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Marshall, Alfred 


Elements of the 
economics of industry 










. .iij ««.K.Jii^ 


Marshall, Alfred, 1842-1924 • 

Elements of the economics of industry; being 
the first volume of Elements of economics. 
3d ed. London, New York, Macmillan, 1903. 

xvi, 421 p. 

Abridgement of the first volume of Principles 
of economics (2d edition, 1891) 



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VOL. I. 








Professtor of Political Economy in the University of Cambridge, 
Honorary Fellow of Balliol College. Oxford. 





[All Riylits reserved.] 

1)1(0 ■ 

First Edition printed 1892. Reprinted 1893, 1894. 
Second Edition 1896. Reprinted 1898, January 1899. 
Third Edition, August 1899.^ 
Reprinted 1900, 1901, 1903 




IN the present edition of this volume some matters which 
had been found difficult by beginners have been omitted, 
others have been relegated to Appendices, and others again 
have been explained at greater length than before. Book IV. 
remains nearly unchanged ; and so does Book VI. except 
Chapters i. ii. and xi.; but a considerable part of Books I. 
II. III. and V. has been rewritten. 

A short treatise on economics is apt to ignore many 
difficulties, and thus to suggest that its conclusions are abso- 
lute when they are really only conditional, and that they are 
universal when really they only apply strictly to a few 
simple cases. If it avoids this danger by pointing out many 
difficulties, with which it has no space to deal effisctively, the 
reader may be perplexed. The little Economics of Iindustry^ 
brought out by my wife and myself in 1879, seems to have erred 
by excess in the first of these directions; and it is perhaps 
through a reaction that the earlier edition of the present 
volume erred by excess in the opposite direction. There were 
indeed several points in the fundamental scheme of Distribu- 
tion and Exchange, on which I had not made up my own 
mind in 1879 : and, partly for this reason, partly because it 
was desired to make the book appear simple, difficulties were 




evaded, and smooth phrases were applied to cover over the 
jagged ends of broken and incomplete discussions. But, as 
years went on, I found that pupils even of some ability were 
misled by the apparently easy and complete solutions which 
were offered in that little book ; and the feeling grew on me 
that one who has never read any economics at all, is likely to 
be a more useful man in his generation than one who has read 
an easy work on economics, and thinks he has mastered the 
subject sufficiently to be able to derive from it trustworthy 
guidance in life. 

As soon therefore as the way was prepared by the publica- 
tion of the first volume of my Principles, I hastened to compile 
a small volume designed for beginners, but written frankly 
without any pretence that a serviceable knowledge of econo- 
mics can be obtained without great effort. No broad and 
simple proposition was admitted without some indication of 
the chief qualifications to which it was liable, and of the 
dangers of applying it unreservedly to practical problems : a 
reference was also generally given to a passage in my larger 
book in which the matter was further studied. No argument 
was purposely compressed. The intention was that any part 
of a discussion which appeared unsuitable for a beginner 
should be omitted altogether, and the rest given in full. But 
I was hurried, and I failed to carry out my intention completely. 
It was found afterwards that a part of a study, which was 
retained, often depended, more than I had noticed ,at the time, 
on a part which had been omitted : and whenever that 
happened, the shortening had made the book not easier but 
more difficult. This is the fault which I have tried to remove 
in the present edition. I have been helped by several persons 
and especially by my wife, by Professor Smart, Professor Flux 



and Dr Keynes. Even with their generous and great aid, I 
cannot hope to have noticed every weak spot. But I trust 
that this edition is more nearly self-contained, and that it is 
somewhat simpler and less technical than the earlier editions. 
The allusions to difficulties which lie beyond the limited range 
of this little volume have been cut down ; but not I hope in 
such a way as to suggest that any short statement of an 
important economic doctrine can present the whole truth and 
nothing but the truth. 

Balliol Croft, Cambridge, 

July, 1899. % 


This volume is an attempt to adapt the first volume of my 
Principles of Ecorwmics (Second edition, 1891) to the needs 
of junior students. 

The necessary abridgment has been effected not by 
systematic compression so much as by the omission of many 
discussions on points of minor importance and of some difficult 
theoretical investigations. For it seemed that the difficulty 
of an argument would be increased rather than diminished 
by curtailing it and leaving out some of its steps. The 
argumentative parts of the Principles are therefore as a 
rule either reproduced in full or omitted altogether ; reference 
in the latter case being made in footnotes to the corresponding 
places in the larger treatise. Notes and discussions of a 
literary character have generally been omitted. 





The influence of trade-unions on wages depends much on 
the course of foreign trade and on commercial fluctuations; 
and therefore in the Principles all discussion of the subject 
is postponed to a late stage. But in the present volume, 
the practical convenience of discussing it in close connection 
with the main theory of distribution seemed to outweigh the 
disadvantages of treating it prematurely and in some measure 
incompletely ; and a chapter on trade-unions has been added 
at the end of Book VI. 

A few sentences have been incorporated from the Economics 
of Industry y published by my wife and myself in 1879. 

Though she prefers that her name should not appear 
on the title-page, my wife has a share in this volume also. 
For in writing it, and in writing the Principles, I have been 
aided and advised by her at every stage of the MSS. and the 
proofs; and thus the pages which are now submitted to the 
reader are indebted twice over to her suggestions, her judg- 
ment and her care. 

Dr Keynes, Mr John Burnett and Mr J. S. Cree have read 
the proofs of the chapter on trade-unions, and have given me 
helpful advice with regard to it from three different points 
of view. 

18 February, 1892. 



{Italics are used to give references to definitioiis of technical terms.] 



Chapter I. Introduction. § 1. Economics is a study of wealth, and a 
part of the study of man. § 2. Urgency of the problem of poverty. 
§ 3. Economics is a science of recent growth. § 4. Characteristics of 
modem business. Free industry and enterprise . . . pp. 1 — 8 

Chapter II. The Growth of Free Industry and Enterprise. § 1. 

Early civilizations. Beginnings of modem forms of business manage- 
ment. Eise of the factory system. §§ 2, 3. The new organization 
accompanied by great evils. Many of these were due to the pressure of 
war, taxes and bad harvests; and competition was seen at its worst. 
But now with the increase of knowledge and wealth we should seek to 
restrain its evil and to retain its good influences . . pp. 9 — 18 

Chapter III. The Scope of Economics. § 1. Economics chiefly con- 
cerned with motives that are measurable ; § 2 but not exclusively selfish. 
Difficulties of measurement pp. 19 — 22 

Chapter IV. Economic Laws. §§ 1, 2. Scientific laws are statements 
of tendencies ; they are exact in the case of some simple sciences, but not 
in the case of complex sciences. § 3. The science of man is very com- 
plex ; and therefore economic laws are not exact. § 4. Economics deals 
mainly with one side of life, but not with the life of fictitious beings. 
5 5. Social law. Economic laio. Normal. Motives to collective action. 

pp. 23—28 

Chapter V. Survey of the work to be done. § 1. General plan of the 
present volume. § 2. The first duty of the economist is to discover 
truth; but the directions of his work arc indicated by urgent social 
problems pp. 29— 32 




Chapter I. Introductory. § 1. Difficulties of definition in Economics. 

p. 33 

Chapter H. Wealth. § 1. Classification of goods. Wealth. § 2. Per- 
sonal wealth. Broad meaning of wealth. § 3. Collective goods. § 4. 
Value pp.34 — 40 

Chapter III. Production. Consumption. Labour. Necessaries. 

§ 1. Man produces and consumes only utilities. § 2. Nearly all labour 
is in some sense productive. § 3. Necessaries for existence and for 
efficiency. Conventional necessanes pp. 41—44 

Chapter IV. Capital. Income. § 1. Capital yields income. Trade 
capital corresponds to money-iucome. § 2. Social capital is a broader 
term. § 3. llelation between different uses of the term Capital. S 4. 
Consumption and auxiliary capital. Circidating, fixed, specialized. § 5. 
Net income. § 6. Net advantages. Interest. Profits, Earnings of 
management. Rent. § 7. Social income .... pp. 45 — ^53 



Chapter I. Introductory. § 1. Scope of Book III. . . pp. 54 — 55 

Chapter II. Wants in relation to Activities. §§ 1 — 3. Wants are 
progi-essive. Desire for variety and distinction. § 4. Desire for excel- 
lence. Relation of wants to activities pp. 56— -60 

Chapter III. Gradations of Demand. ^ 1. The term utility. The 
law of satiable toants or diminishing utility. Total utility. Marginal 
increment. Marginal utility. Marginal demand price. § 2. The mar- 
ginal utility of money varies. A person's demand for anything. § 3. 
Increase in a person's demand. § 4. Demand of a market. Law of 
demand ........... pp. 61 — 68 

Chapter rv. The Elasticity of wants. §1. Elasticity of demand. §§2,3. 
It varies witli different incomes. § 4. Demand for necessaries. § 5. 
Some causes that obscure the influence of price on demand pj). 69 — 74 

Chapter V. The Choice between different uses of the same thing. 
Immediate and deferred uses. ^§ 1, 2. Distribution of means 
between different uses. § 3. Distribution between present and future 
needs. Discounting future pleasures pp. 75 — 78 

Chapter VI. Value and Utility. §§ 1, 2. Consumers* stirphis. § 3. 
Allowance for collective wealth. Wisdom in the pursuit and use of 
wealth pp. 79— 84 







Chapter I. Introductory. § 1. Subjects discussed in Book IV. Supply 
price pp.85— 86 

Chapter II. The Fertility of Land. § 1. Land in what sense a free 
gift of nature. § 2. Man's power of altermg the character of the soil. 
Conditions of fertility pp. 87— 90 

Chapter III. The Fertility of Land, continued. The Law of 
Diminishing Return. § 1. The basis of the Laio of diminishing 
return. The return is measured by the amount not the price of produce. 
§ 2. A dose of capital and labour, marginal dose, marginal return, margin 
of ctdtivation. Surplus produce. Its relation to rent. § 3. The order 
of relative fertility changes with circumstances. § 4. Good cultivation a 
relative term. § 5. Misunderstandings of Kicardo's doctrine. § 6. The 
return from fisheries, and mines PP- 91 — 102 

Chapter IV. The Growth of Population. § 1. Malthus. §§ 2, 3. ^ 
Causes that determine marriage-rate and birth-r^te . § 4. History of ^ 
population in England. § 5. Modern causes affecting marriage-rate. 
^ ^ 6 3 pp. 103-110 

Chapter V. The Health and Strength of the Population. §§ 1, 2. 

General conditions of health and strength. § 3. Hope, freedom and 
change. § 4. Influence of occupation. Town life. § 5. Nature's ten- 
dency to select the strongest for survival is often comiteracted by man. 
^ pp. 111—119 

Chapter VI. Industrial Training. § 1. Unskilled labour a relative 
term. General and specialized ability. §§ 2, 3. Liberal and technical 
education. Apprenticeships. § 4. Education as a national investment. 
S 5. Mill's four industrial grades; but sharp lines of division are fading 
Iway pp. 120-128 

Chapter VII. The Growth of "Wealth. § 1. Early and modem forms 
of wealth. § 2. Slow growth of habits of savmg. § 3. Security as a 
condition of saving. § 4. The chief motive of saving is family affection. 
§ 5. The source of accumulation is surplus income. Profits. Kent and 
earnings. Collective savings. § 6. Interest is the reward of waiting. 
Influence of changes in the rate of interest on saving . . pp. 129 — 138 

Chapter VIII. Industrial Organization. § 1. Organization uicreases 
efiicieucy. Teachings of biology. The law of the struggle for sm-vivaL 
§ 2. Harmonies and discords between individual and collective interests. 

pp. 139—141 

Chapter IX. Industrial Organization, continued. Division of La- 
bour. The Influence of Machinery. § 1. Practice makes perfect. 
The provinces of manual labour and machinery. § 2. Interchangeable 
parts. Machinery increases the demand for general intelligence and 
weakens barriers between different trades. § 3. It relieves the stram 
on human muscles, and thus prevents monotony of work from involving 



monotony of life. § 4. Specialized skill and specialized machinery com- 
pared. External and Internal economics . . . pp. 142 — 150 

Chapter X. Industrial Organization, continued. The Concentra- 
tion of Specialized Industries in Particular Iiocalities. § 1. 

Primitive forms of localized industries; their various origins. § 2. Ad- 
vantages of localized industries; hereditary skill, subsidiary trades, spe- 
cialized machinery, local market for skill. Their disadvantages. Move- 
ments of Enghsh industries pp. 151 — 155 

Chapter XI. Industrial Organization, continued. Production on 
a large scale. §§1, 2. Advantages of a large producer as to economy 
of material, specialization of and improvements in machinery, buying and 
seUing; speciahzed skill, especially in matters of management, but the 
small producer makes many detailed savings . . pp. 156 — 161 

Chapter XII. Industrial Organization, continued. Business 
Management. § 1. Yarions forms of business management classified 
with reference to the tasks of undertakmg risks and of superintendence. 
§ 2. Faculties required in the ideal manufactm-er. § 3. Hereditary 
businesses, why they are not more common. § 4. Private partnerships. 
§ 5. Joint-stock companies. Government undertakings. § 6. Co-opera- 
tion. Profit sharing. § 7. The rise of the working man hindered by 
his want of capital and even more by the growing complexity of business. 
§ 8. Adjustment of capital to business ability. Net and Gross earnings 
of management pp. 162 — 178 

Chapter XIII. Conclusion. The Law of Increasing in Relation 
to that of Diminishing Return. § 1. Eelation of the later chap- 
ters of this Book to the earher. A Representative firm. The laws of 
increasing and constant return. § 2. Conditions under which an increase 
of numbers leads to a more than proportionate increase of coUective 
efficiency pp. 179 — 183 



Chapter I. On Markets. § 1. Most economic problems have a common 
kernel relating to the equilibrium of supply and demand. § 2. Definition 
of a Market. §§ 3, 4. Limitations of a market with regard to space. 
Conditions of a wide market. Grading. Portabihty. World markets. 

pp. 184—189 

Chapter II. Temporary Equilibrium of Demand and Supply. 

§ 1. Equilibrium between desire and effort. § 2. Illustration from a 
local corn-market of a true though temporary equiUbrium. § 3. Trtinsi- 
tion to normal prices pp. 190 — 193 

Chapter III. Equilibrium of Normal Demand and Supply. § 1. 

Transition from market to normal price. § 2. Heal and money cost of 
^production. Expenses of j>roduction. Factors of production. § 3. The 
principle of substitution. § 4. Basis of the general theory. The supply 
schedide. § 5. Equilibriuvi amount and equilibrium price. § 6. Com- 




T>lexity of the problems of real life. § 7. Influences of utility and cost of 

• production on value. The former preponderates in market values, the 

StTert Sormal values. § 8. Rent in relation to expenses of^produg 

tion ^^' 

Chanter IV. The Investment of Capital in a Business. Prime 
Cost aiid Total Cost. § 1. Motives determinmg the investment of 
ranital 5 2. Different routes are chosen in obtaining the same end 
Tlfe margin of profitableness. § 3. Pdme cost. Supplementaryj^^ 

total cost ^"' 

Chanter V. Equilibrium of Normal Demand and Supply, con^ 
tinuel -nie Term Normal with Reference to Long and Short 
Periods. §§ 1-4. Elasticity of the term normal Long and short 
perLdnormll prices. Illustrations. §5 The general drift of the term 
Normal Supply Price is the same for short and long periods. § 6. There 
is no sharp division between long and short periods . pp. 208—21 / 

Chanter VI. Joint and Composite Demand. Joint and Comproite 
SuDDly. ^ 1. Derived demand and joint demand. § 2. Illustration, 
taken from a labour dispute. Conditions under which a check to supply 
may raise much the price of a factor of production. Moderatmg influence 
of the prmciple of substitution. § 3. Composite demand. § 4. Joint 
supply. % 5. Composite supply. §6. Intricate relations between the 
values of different thmgs PP- 218— 2io 

Chapter VII. Prime and Total Cost in relation to Joint Products. 
Cost of Marketing. Insurance against Risk. §1. Difficulties as 
to the joint products of the same business and as to the expenses of 
marketing. § 2. Insurance agamst risk . . . • PP- 22b— 2iiy 

Chapter VIII. Short notes on several problems. § 1. Q^iasi-rents. 
«2. MonopoUes. §3. Indirect results of variations m demand 
^ i- u pp^ 230 — 232 



Chapter I. Preliminary Survey of Distribution and Exchange. 

Tl Drift of iBook VI. The problem difficult; we must work graduaUy 
L a series of sunple illustrative cases. § 2. First case : all suppose<l 
industrially equal, population stationaiy. § 3 Next each has his own 
trade §4- Next allow for a gi'owth of population. § 5. Next allow for 
differences m grade. § 6. We leave ima^iary cases^and [etYU to real 
life, but we still consider only the side of demand. Principle of s^ubstitu- 
tion impUed in the common saying that in business eveirthmg findsits 
own level. Net product. § 7. The demand for capital. § 8. Pro- 
visional conclusion. Marginal uses do not govern value, but are governed 
bv the conditions of demand in relation to supply. Their importance 
consists in the fact that the foi-ms which govern value can »e seen in 
active operation at these margins alone , . . W- 2^;*— ^*4 




Cliapter II. PreUminary Snrvey of Distribution and fixchanee 
continued. §§ 1, 2. We now pass from the side of demand to that of^ 
supply; and consider the influence which the remuneration of each agent 
of production exerts on its supply. Firstly as to labour: Though some 
labour is pleasurable, and many people would rather work than be idle 
yet mcreased remuneration generally stimulates to increased exertions' 
and the supply of efficient labour is mainly dependent on good earnings' 
Wages are governed by demand in relation to supply. § 3 Almost 
everythmg that is true of labour and wages, is true with appropriate 
mod^cations of capital and interest. § 4. But land and rent proper 
stand on a different footmg. § 5. Provisional conclusion. The national 
income or dividend is divided out among the various agents of production 
m proportion to the need which persons have of their several services at 
the margins of demand for them, that is at the points at which people 'are 
m doubt whether those particular services are fully worth what they cost 
§§ 6, 7. Relations between the earnmgs and efficiencies of different 
classes of labour. § 8. Competition is not supposed to be perfect, but to 
act as it does m real life. §§ 9, 10. General relations between labour 
^d capital pp. 245-258 

Chapter III. Earnings of Labour. §1. Time-eartiings. Payment 
by piece-work. Ejficiency-earmiu/s. Time-earnings do not tend to 
equahty, but Efficiency-earnings do. § 2. Heal loages and nominal 
2cages. § 3. Uncertamty of success. Irregularity of employment. 
Supplementary earnings. § 4. The attractiveness of a trade depends on 
its 7iet advantages pp 259 267 

Cbapter IV. Earnings of Labour, continued. § 1. Many peculiari- 
ties m the action of demand and supply with regard to labour are cumida- 
twe in then- effects. §§ 2—4. The worker sells his work, but he himself 
has no price, consequently the investment of capital in him is limited by 
the means, forethought and unselfishness of his parents. Economic im- 
portance of moral forces. § 5. The seller of labour must deliver it him- 
self. § 6. Labour is perishable, and the sellers of it are often at a 
disadvantage m bargaining pp. 208— 276 

Chapter V. Earnings of Labour, concluded. § 1. Slowness of growth 
of new supphes of labour. Difficulties of forecasting the future. § 2. 
The movements of adult labour are of increasing importance § 3 Fluc- 
tuations of earnings chiefly governed by those of demand. § 4. Causes 
which detenmne earnmgs during long and short periods respectively 

pp. 277—281 

Chapter VL Interest of Capital. § 1. Interest on capital has been 
]eaously scrutmized; and not altogether without reason: but it is as 
*]*T ^ a return for services rendered as the wages of labour are. §§ 2, 3 
^et and gross interest. Gross interest includes some insurance against 
nsks both trade and personal, and also earnings of management, and 
therefore does not tend to equality as net interest does . pp. 282—286 

Chapter VIL Profits of Capital and Business Power. § 1. Action 
ot the straggle for survival. Services of those who pioneer. § 2. Action 
of the law of substitution in controlling earnings of management. S 3 
Ihe law of substitution acts through the employer and also on him 
Ihe busmess man working with borrowed capital. § 4. Joint stock 
companies. § 5. The supply of busmess ability is drawn from a wide 
?^^*i ^"v J^ non-specialized. The adjustment of earnings of management 
to the tUlhculty of the work to be done is fairly accurate . pp. 287—294 



Chapter VIII. Profits of Capital and Business Power, continued. 

§ 1. Profits. Itate of profits how far teiiduig to equality. Profits in 
small businesses appear higher than they are. Kate of profits declines 
generally as the size of the business increases. § 2. Profits are high 
•where the circulating capital is large relatively to the fixed. § 3. The 
rate of profits on the turnover vai-ies much more widely than the annual 
rate of profits on capital. § 4. Profits are a constituent element of normal 
supply-price, but the income derived from capital ah-eady invested is 
generally detennined by the price of the product. §§ 5, 6. The earnings 
of business power fluctuate more and vai-y more from one individual to 
another than ordinary earnings do . . . . . pp. 295 — 302 

Chapter IX. Rent of Land. § 1. Causes that govern rent, or, more 
generally, producers' surplus. § 2. The argument so far applicable to 
nearly all systems of land tenure pp. 303 — 306 

Chapter X. Land Tenure. § 1. Early forms of land tenure have gene- 
rally been based on partnerships. § 2. Metayage or rental by shares. 
Peasant-proprietorship, its advantages and disadvantages. The American 
farmer. § 3. The English system enables the landlord to supply that 
capital over which he can keep control and it gives considerable freedom 
of selection. §§ 4, 5, Large and small holdings. Allotments. Co- 
operation. § 6. Conflict between public and private interests in the 
matter of building on open spaces pp. 307 — 317 

Chapter XI. General view of Distribution. §§ 1—3. Summary of 
chapters in — x. §§ 4, 5. Continuation of the argument of chapter n. 
The agents of production are the sole source of employment for one 
another. How an increase of capital enriches the field for the employ- 
ment of labour. How an increase of any group of workers, in number or 
in efficiency, affects the earnings of that group and of other groups 

^ pp. 318— 325 

Chapter XII. The Influence of Progress on Value. § 1. The rich- 
ness of the field of employment for capital and labour in a new country 
depends partly on its access to markets in which it can sell its goods and 
mortgage its future income for present suppUes of what it wants. § 2. 
England's direct gains from the progress of manufactures have been less 
than at first sight appears, but those from the new means of transport 
have been greater. § 3. Changes in the labour values of corn, meat, 
house-room, fuel, clothing, water, light, news and travel. § 4. Progress 
has raised the labour value of English land, urban and raral, taken 
together. § 5. The increase of capital has lowered its proportionate but 
not its total income. §§ 6, 7. Changes in the earnings of different Indus- 
trial classes. § 8. Earnings of exceptional ability. § 9. Progress has 
probably lessened inconstancy of employment. § 10. Broader influence 
of progress. Standard of comfort and standard of life. § 11. Progress 
in relation to leisure. The wastefulness of excessive work. § 12. In 
some trades shorter hours combmed with double shifts would bring almost 
unmixed gain, § 13. But in many trades shortening the hours of labour 
would lessen the output. §§ 14, 15. Fallacies underlying the opinion 
that a general lessening of the hours of labour would raise wages. § 16. 
General conclusion as to the good and evil of a reduction of the hom-s of 
labour pp. 326— 357 

Chapter XIII. Trade-unions. § 1. Early history of trade-unions. 
§ 2. General organization. § 3. Opening of inquiry as to the influence 



they can exert on wages. Recapitulation of effects of a permanent limita- 
tion of the supply of labour. §§ 4, 5. Transition to effects of temporary 
limitations, by strikes or otherwise, of the supply of labour. Disadvan- 
tage in bargaining of the isolated workman without reserve. Claim of 
unions to make economic friction side vath, instead of against, the work- 
man; and thus to raise wages generally. §§ 6 — 8. Rejoinder by oppo- 
nents of unions. § 9. The issue turns mainly on the question whether 
unions on the whole hamper busmess and lessen production; and this 
needs some detailed study of then- chief modes of procedure under the 
heads of :— § 10. Strikes; § 11. Fixed local minimum wage; and § 12. 
Piece-work. § 13. In trades much subject to foreign competition unions 
generally follow an enUghtened poHcy and facihtate business. § 14. 
Other trades in which strong unions may on the whole facilitate business. 
§ 15. Influence on the national dividend exerted by combinations of 
employers and of employed in trades not much subject to external compe- 
tition. §§ 16, 17. Influence of imions on the character and efficiency 
of the worker. § 18. Facts seem to show that, other things being equal, 
wages are generally high in trades that have strong unions relatively to 
those that have not ; but they do not enable us to determine what is the 
effect of unions on the aggregate of wages. §§ 19, 20. Summary and 
general conclusions. Moral and economic aspects of the problem. Power 
and responsibihty of public opinion PP- 358 — 395 

Appendix A. Methods of study PP- 396—399 

Appendix B. Consumers' surplus PP- 400 — 404 

Appendix C, Rent, or income from an appUance for production not made 
by man, in relation to the value of its produce . . . PP- 405 — 407 

Appendix D. Quasi-rent, or income from an appliance for production 
already made by man, in relation to the value of its produce pp. 408 — 410 

Appendix E. The development of the doctrine of Wages . pp. 411-^16 

Index pp. 417-421 

The fourth edition of my ''Principles" is that to tchich references are 
made in the present volume. But most of them are aja^licable also to earlier 






§ 1. Political Economy, or Economics, is a study of 
man's actions in the ordinary business of life : it ,:. . . 

•^ ' Economics is 

inquires how he gets his income and how he a study of 
uses it. It follows tlie action of individuals and ^n of the 
of nations as they seek, by separate or collective ^^^^^ °^ "^^"• 
endeavour, to increase the material means of their well-being 
and to turn their resources to the best account. Thus it is on 
the one side a study of wealth, and on the other, and more 
important side, a part of the study of man. For man's 
character has been moulded by his every-day work, and by 
the material resources which he thereby procures, more than 
by any other influence unless it be that of his religious ideals ; 
and the great forming agencies of the world's history have 
been the religious and the economic. Here and there the 
ardour of the military or the artistic spirit has been for a 
while predominant : but religious and economic influences have 
nowhere been displaced from the front rank even for a time ; 
and they have nearly always been more important than all 
others put together. Religious motives are more intense than 
economic ; but their direct action seldom extends over so large 
a part of life. For the business by which a person 
earns his livelihood generally fills his thoughts formed by 
during by far the greater part of those hours in ^^'^^ "^°^^' 
which his mind is at its best; during them his character is 
being formed by the way in which he uses hi» faculties in 
M, eg 1 


BOOK I. CH. T. § 1, 2. 


his work, by the thoughts and the feelings which it suggests, 
and by his relations to his associates in work, his employers 
or his employes. 

And very often the influence exerted on a person's 
character by the amount of his income is hardly less, if it 
is less, than that exerted by the way in which it is earned. 
Poverty causes I^ "^akes little difference to the fulness of life 
degradation. of a family whether its yearly income is £1000 
or £5000. But it makes a very great difference whether the 
income is £30 or £150: for with £150 the family has, with 
£30 it has not, the material conditions of a complete life. 
It is true that in religion, in the family affections and in 
friendship, even the poor may find scope for many of those 
faculties which are the source of the highest happiness. 
But the conditions which surround extreme poverty, especially 
in densely crowded places, tend to deaden the higher faculties. 
Those who have been called the Residuum of our large towns 
have little opportunity for friendship; they know nothing of 
the decencies and the quiet, and very little even of the unity 
of family life; and religion often fails to reach them. No 
doubt their physical, mental, and moral ill-health is partly 
due to other causes than poverty, but this is the chief cause. 

And in addition to the Residuum there are vast numbers 
of people both in town and country who are brought up with 
insufficient food, clothing, and house-room, whose education 
is broken off early in order that they may go to work for 
wages, who thenceforth are engaged during long hours in 
exhausting toil with imperfectly nourished bodies, and have 
therefore no chance of developing their higher mental faculties. 
Their life is not necessarily unhealthy or unhappy. Rejoicing 
in their affections towards God and man, and perhaps even 
possessing some natural refinement of feeling, they may lead 
lives that are far less incomplete than those of many who 
have more material wealth. But, for all that, their poverty 
is a great and almost unmixed evil to them. Even when they 



are well, their weariness often amounts to pain, while their 
pleasures are few ; and when sickness comes, the suffering 
caused by poverty increases tenfold. And though a contented 
spirit may go far towards reconciling them to these evils, 
there are others to which it ought not to reconcile them. 
Overworked and undertaught, weary and careworn, without 
quiet and without leisure, they have no chance of making 
the best of their mental faculties. 

Although then some of the evils which commonly go with 
poverty are not its necessary consequences ; yet, broadly 
speaking, "the destruction of the poor is their poverty," and 
the study of the causes of poverty is the study of the causes 
of the degradation of a large part of mankind. 

§ 2. Slavery was regarded by Aristotle as an ordinance 
of nature, and so probably was it by the slaves is poverty ne- 
themselves in olden time. The dignity of man cessary? 
was proclaimed by the Christian religion: it has been as- 
serted with increasing vehemence during the last hundred 
years : but it is only through the spread of education during 
quite recent times that we are beginning at last to feel the 
full import of the phrase. Now at last we are setting our- 
selves seriously to inquire whether it is necessary that there 
should be any so-called "lower classes" at all: that is, whether 
there need be large numbers of people doomed from their 
birth to hard work in order to provide for others the requisites 
of a refined and cultured life; while they themselves are pre- 
vented by their poverty and toil from having any share or 
part in that life. 

The hope that poverty and ignorance may gradually be 
extinguished derives indeed much support from the steady 
progress of the working classes during the present century. 
The steam-engine has relieved them of much exhausting 
and degrading toil ; wages have risen ; education has been . 
improved and become more general; the railway and the 
printing-press have enabled members of the same trade in 


4 BOOK I. CH. I. §§ 2, 8, 4. 

different parts of the country to communicate easily with 
one another, and to undertake and carry out broad and far- 
seeing lines of policy ; while the growing demand for intel- 
ligent work has caused the artisan classes to increase so 
rTpidly that they now outnumber those whose labour is 
entirely unskilled. A great part of the artisans have ceased 
to belong to the "lower classes" in the sense in which the 
term was originally used; and some of them already lead a 
more refined and noble life than did the majority of the 
upper classes even a century ago. 

This progress has done more than anything else to give 
practical interest to the question whether it is really impossible 
that all should start in the world with a fair chance of 
leading a cultured life, free from the pains of poverty and 
the stagnating influences of excessive mechanical toil .; and 
this question is being pressed to the front by the growing 

earnestness of the age. 

The question cannot be fully answered by economic 
science ; for the answer depends partly on the moral and 
political capabilities of human nature; and on these matters 
the economist has no special means of information; he must 
do as others do, and guess as best he can. But the answer 
depends in a great measure upon facts and inferences, which 
are within the province of economics; and this it is which 
gives to economic studies their chief and their highest in- 


§ 3. It might have been expected that a science, which 
Reasons why dells with questions SO vital for the well-being of 
Economics is j^ankind, would have engaged the attention of 
i^c^nt'^ro^h. many of the ablest thinkers of every age, and be 
now well advanced towards maturity. But the bearing of 
economics on the higher well-being of man has been over- 
looked; and it has not received that share of attention which 
its importance and its difficulty require. 

Its progi-ess has been hindered also by the fact that many 



of those conditions of industrial life, and of those methods of 
production, distribution and consumption, with which modern 
economic science is concerned, are constantly changing, and 
that their present forms are only of recent date'. 

§ 4. It is often said that the modern forms of business 
are distinguished from the earlier by being more 

o . ... Competition. 

competitive. But this account is not quite satis- 
factory. The strict meaning of competition seems to be the 
racing of one person against another, with special reference to 
bidding for the sale or purchase of anything. This kind of 
racinfr in business is no doubt both more intense and more 
widely extended than it used to be : but it is only a secondaiy, 
and one might almost say, an accidental consequence from the 
fundamental characteristics of modern business. 

There is no one term that will express these characteristics 
adequately. They are, as we shall presently see, a certain 
independence and habit of choosing one's own course for one- 
self, a self-reliance; a deliberation and yet a promptness of 
choice and judgment, and a habit of forecasting the future 
and of shaping one's course with reference to distant aims. 
They may and often do cause people to compete with one 
another ; but on the other hand they may tend, and just now 
indeed they are tending, in the direction of co-operation and 
combination of all kinds good and evil. But these tendencies 
towards collective ownership and collective action are quite 

1 It is indeed true that the change in substance is in some respects not so 
great as the change in outward form ; and much more of modern economic 
theory than at first appears can be adapted to the conditions of backward 
races. But the changes in form have hindered writers of each successive age 
from deriving much benefit from the work of their predecessoj-s. Modem 
economic conditions however, though very complex, are in many ways more 
definite than those of earUer times : business is more clearly marked off from 
other concerns of life; the rights of individuals as against others and as 
against the community are more sharply defined ; and above all the emancipa- 
tion from custom, and the growth of free activity, of constant forethought 
and restless enterprise have given a new precision and interest to the study 
of value. 

6 BOOK I. CH. I. § 4. 

different from those of earlier times, because they are the 
result not of custom, not of any passive drifting into asso- 
ciation with one's neighbours, but of free choice by each 
individual of that line of conduct which after careful delibe- 
ration seems to him the best suited for attaining his ends, 
whether they are selfish or unselfish. 

Further the term "competition" not only fails to go to 
tlie root of the matter, and thus errs by defect; it also errs 
by excess. For it has gathered about it evil savour, and has 
come to imply a certain selfishness and indifference to the 
well-being of others. Now it is true that there is less delibe- 
rate selfishness in early than in modern forms of industry; 
but there is also less deliberate unselfishness. It is the delibe- 
rateness, and not the selfishness, that is the characteristic of 
the modem age. 

Custom in a primitive society extends the limits of the 
family, and prescribes certain duties to one's 

Man is not *" , . i « m • ^^ • i . 

more selfish neighbours which fall into disuse m a later civi- 
than he was, ji^ation ; but it also prescribes an attitude of 
hostility to strangers. In a modern society the obligations of 
family kindness become more intense, though they are concen- 
trated on a narrower area; and neighbours are put more 
nearly on the same footing with strangers. In ordinary deal- 
ings with both of them the standard of fairness and honesty 
is lower than in some of the dealings of a primitive people 
with their neighbours, but it is much higher than in their 
dealings with strangers. Thus it is the ties of neighbourhood 
alone that have been relaxed. The ties of family are in 
many ways stronger than before ; family affection leads to 
much more self-sacrifice and devotion than it used to do. 
And again sympathy with those who are strangers to us is a 
growing source of a kind of deliberate unselfishness that never 
existed before the modern age. That country which is the 
birthplace of modern competition devotes a larger part of its 
income than any other to charitable uses, and spent twenty 



millions on purchasing the freedom of the slaves in the West 
Indies. In every age poets and social reformers have tiied to 
stimulate the people of their own time to a nobler life by 
enchanting stories of the virtues of the heroes of old. But 
neither the records of history nor the contemporary observa- 
tion of backward races, when carefully studied, give any 
support to the doctrine that man is on the whole harder and 
harsher than he was, or that he was ever more willing than 
he is now to sacrifice his own happiness for the benefit of 
others in cases where custom and law have left him free to 
choose his own course. Among races whose intellectual capa- 
city seems not to have developed in any other direction, and 
who have none of the originating power of the modern busi- 
ness man, there will be found many who show an evil sagacity 
in driving a hard bargain in a market even with their neigh- 
bours. No traders are more unscrupulous in taking advantage 
of the necessities of the unfortunate than the corn-dealers and 
money-lenders of the East. 

Again, the modern era has undoubtedly given new open- 
ings for dishonesty in trade. The advance of nor more dis- 
knowledge has discovered new ways of making honest, 
things appear other than they are, and has rendered possible 
many new forms of adulteration. The producer is now far 
removed from the ultimate consumer; and his wrong-doings 
are not visited with the prompt and sharp punishment which 
falls on the head of a person who, being bound to live and die 
in his native village, plays a dishonest trick on one of his 
neighbours. The opportunities for knavery are certainly more 
numerous than they were ; but there is no reason for thinking 
that people avail themselves of a larger proportion of such 
opportunities than they used to do. On the contrary, modem 
methods of trade imply habits of trustfulness on the one side 
and a power of resisting temptation to dishonesty on the other, 
which do not exist among a backward people. Instances of 
simple truth and personal fidelity are met with under all social 




conditions : but those who have tried to establish a business 
of modern t}'pe in a backward country find that they can 
scarcely ever depend on the native population for filling posts 
of trust. Adulteration and fraud in trade were rampant in the 
middle ages to an extent that is surprising when we consider 
the difficulties of wrong doing without detection at that time. 

The term "competition" is then not well suited to describe 
the special characteristics of industrial life in the modem age. 
We need a term that does not imply any moral qualities, 
whether good or evil, but which indicates the undisputed fact 
that modern business is characterized by more self-reliant 
habits, more forethought, more deliberate and free choice. 
There is not any one term adequate for this purpose : but 


Freedom. shortly, ECONOMIC FREEDOM, points in the right 

direction, and may be used in the absence of a better. 

Of course this deliberate and free choice may lead to a cer- 
tain departure from individual freedom, when co-operation or 
combination seems to offer the best route to the desired end. 
The questions how far these deliberate forms of association are 
likely to destroy the freedom in which they had their origin, 
and how far they are likely to be conducive to the public weal, 
will occupy a large share of our attention towards the end of 
this treatise. 

1 \ 




§ 1. The growth of Economic Freedom has been slow 
and fitful. Early civilizations were necessarily Early civiu- 
in warm climates because no great advance in ^*^°"®' 
culture can be made except where there is a considerable 
surplus above the bare necessaries of life; and influence of 
in a cold climate man's whole energies are ab- <^^*'"***- 
sorbed in providing these necessaries, unless he is aided by 
accumulated wealth and knowledge. But a warm climate 
lowers energy and in consequence the great body of workers 
in the old civilizations of the East were of a submissive and 
unenterprising character; and were kept to their work by 
the discipline of the ruling castes. These ruling castes had 
generally come at no distant date from a more bracing climate, 
either in mountainous regions or in the distant North. They 
devoted themselves to war, to political and sacerdotal func- 
tions, and sometimes to art ; but they avoided manual work, 
and left that to serfs and slaves. The manual labour classes 
scarcely even conceived the idea of freedom ; but looked to 
custom as the great protector against arbitrary oppression. 
It is true that some customs were very cruel ; influence of 
but if customs were merely cruel they speedily ^"s*°™- 
destroyed the lower classes and therefore also the upper 
classes who rested on them. And in consequence those races 
which have had a long history are also those whose custoijis 
have on the whole been kindly, and the good largely pre- 
dominates over the evil in the records of the influence of 
custom on moral as well as physical well-being. 

10 BOOK I. CH. II. § 1. 

There is niucli to be learnt even now from the ideals of 

. . the life of the free citizen which were thought 

Ancient i i • i 

Greece and out by the best minds among the Greeks and 

ome. Romans. But those ideals started from the 

assumption that the free man should avoid all hard and 
depressing toil, and leave that for slaves. The great body of 
the workers were in slavery, and there were no high ideals 
of life for them. Thus even the best thought of Greece and 
Rome left on one side the central problem of our age : it 
never even inquired how far it might be possible for those 
who bore the chief burden of the world's work to lead lives 
worthy of man ; it certainly did not pioneer the path of 
The Middle modem industry. Later on the Christian faith 
Ages. iu the brotherhood of all men did something to 

lighten the lot of the poor. But it was often a form of 
words rather than a living power to govern men's actions : 
and the ruling classes kept the main body of the people in a 
serfdom, which was not always happy. 

Freedom had more scope in the great trading and in- 
dustrial towns ; from them the leadership in 

Transition . p v j j 

to modern economic progi'ess passed, about four hundred 
industry. years ago, to Holland and other countries ; and 

nearly two hundred years ago the first place among the 
leaders fell to England. 

The English had always been vigorous, but they had not 
always been industrious ; and it was long before they showed 
much power of making new inventions, and of organizing 
work so as to make it effective. But England offered an 
asylum from religious persecution to the protestant artisans 
of the Continent, who were also generally the ablest, the most 
inventive, and most stedfast. Their instruction gave England 
the right lines on which to work. She derived stimulus from 
the trade across the Atlantic and Pacific Oceans, which 
followed the discovery of America and of the route round 
the Cape : for she was better situated than any other country 




4 % 

for this trade; and the work suited well the temper of her 
people. America and Asia alike offered markets for simple 
manufactures made in large quantities on the same pattern. 
Thus she began to grow in wealth ; and she gradually 
applied her energies more and more to manufacturing on a 
large scale. One invention followed another in rapid succes- 
sion. She used water power, and afterwards steam power 
to take off some of the most wearisome work from the hands 
of men and women, and to increase production ; and in a 
way things went well with her\ 

But there was another side to the picture. Up to the 
eighteenth century the wages of labour had been much under 
the influence of custom ; and what competition there was 
for employment was mostly confined to a small area ; a town 
or a few villages in the same neighbourhood. But the new 
industry in the latter half of the eighteenth century began 
to attract artisans and labourers from all parts of England 
to the manufacturing districts. 

At first there were few large factories. Capitalists 

1 The quarter of a century beginning with 1760 saw improvements follow 
one another in manufacture even more rapidly than m agriculture. During 
that period the transport of heavy goods was cheapened by Brindley's canals, 
the production of jwwer by Watt's steam-engine, and that of iron by Cort's 
processes of puddling and rolling, and by Roebuck's method of smelting it by 
coal in lieu of the charcoal that had now become scarce ; Hargreaves, Cromp- 
ton, Arkwright, Cartwright and others invented, or at least made economi- 
cally serviceable, the spinning jenny, the mule, the carding machine, and the 
poAver-loom; Wedgwood gave a great impetus to the pottery trade that was 
already growuig rapidly; and there were important inventions in printing 
from cylinders, bleaching by chemical agents, and in other processes. A 
cotton factory was for the first time driven directly by steam-power in 1785, 
the last year of the period. The beguiniug of the nineteenth century saw 
steam-ships and steam printing-presses, and the use of gas for lighting towns. 
Railway locomotion, telegraphy and photography came a little later. Our 
own age has seen numberless improvements and new economies in production, 
prominent among which are those relating to the production of steel, the tele- 
phone, the electric light, and the gas-engine ; and the social changes arising 
from material progress are in some respects more rapid now than ever. But 
the groundwork of the changes that have happened suice 1785 was chiefly laid 
in the inventions of the years 1760 to 1785. 




BOOK I. CH. II. §§ 1, 2. 



distributed their orders to a great number of small masters 
scattered over the country wherever there was water-power 
to be had; they themselves undertaking the risks of buying 
the raw material and selling the manufactured goods. It was 
only when steam-power began to displace water-power that 
the size of the factories increased rapidly. But, both in its 
earlier and its later forms, the new movement tended to release 
the bonds that had bound nearly everyone to live in the 
parish in which he was bom ; and it developed free markets. 
The working classes became more migratory, and more ac- 
customed to try to sell their labour in the best market, 
wherever it could be found, while the employers also ranged 
far a-field in their search for workers. 

§ 2. Thus the new organization of industry added vastly 
to production ; but it was accompanied by some great evils. 
The new Which of these evils was unavoidable we cannot 

organization ^^jl. For just when the change was movinjj 

accompanied *' ^ ° 

by great evils, most quickly, England was stricken by a com- 
bination of calamities almost unparalleled in history. They 
were the cause of a great part — it is impossible to say of how 
great a part — of the sufterings that are commonly ascribed to 
the sudden outbreak of unrestrained competition. The loss of 
her great colonies was quickly followed by the great French 
war, which cost her more than the total value of the accu- 
mulated wealth she had at its commencement. An un- 
precedented series of bad harvests made bread fearfully dear. 
And worse than all, a method of administration of the poor 
law was adopted which undermined the independence and 
vigour of the people. 

The first part of this century therefore saw free enterprise 
establishing itself in England under unfavourable circum- 
stances, its evils being intensified, and its benefits being 
lessened by external misfortunes. 

The old trade customs and gild regulations were un- 
suitable to the new industry. In some places they were 



abandoned by common consent: in others they were suc- 
cessfully upheld for a time. But it was a fatal ^^^^p^g ^o 
success; for the new industry, incapable of flourish- maintain old 
ing under the old bonds, left those places for *"^^" 
others where it could be more free. Then the workers 
turned to Government for the enforcement of old laws of 
Parliament prescribing the way in which the trade should be 
carried on, and even for the revival of the regulation of prices 
and wages by justices of the peace. 

These efforts could not but fail. The old regulations had 
been the expression of the social, moral and economic ideas 
of the time; they had been felt out rather than thought out; 
they were the almost instinctive result of the experience of 
venerations of men who had lived and died under almost 
unchanged economic conditions. In the new age changes 
came so rapidly that there was no time for this. Each man 
had to do what was right in his own eyes, with but little 
guidance from the experience of past times; those who en- 
deavoured to cling to old traditions were quickly supplanted. 

The new race of manufacturers consisted chiefly of those 
who had made their own fortunes, strong, ready, enterprising 
men: who, looking at the success obtained by their own 
energies, were apt to assume that the poor and the weak 
were to be blamed rather than to be pitied for their mis- 
fortunes. Impressed with the folly of those who tried to 
bolster up economic arrangements which the stream of pro- 
gress had undermined, they were apt to think that nothing 
more was wanted than to make competition perfectly free 
and let the strongest have their way. They glorified indi- 
vidualism, and were in no hurry to find a modern substitute 
for the social and industrial bonds which had kept men 
together in earlier times. 

Meanwhile misfortune had reduced the total net income of 
the people of England. In 1820 a tenth of it was absorbed 
in paying the mere interest on the National Debt. The goods 



BOOK I. CH. II. § 2. 




that were cheapened by the new inventions were chiefly manu- 
inQuence of factured commodities of which the working man 
war, heavy ^^^^ j^^^ g^ smsAl consumcr : but the Corn-Laws 

taxes and dear- . i i i r j 

nessoffood. prevented him from getting cheaply the bread 
on which he often spent three-fourths of his little wages. 
He had to sell his labour in a market in whicli the forces 
of supply and demand would have given him a poor pittance 
even if they had worked freely. But he had not the full 
advantage of economic freedom; he had no efficient union 
with his fellows ; he had neither the knowledge of the market, 
nor the power of holding out for a reserve price, which the 
seller of commodities has, and he was urged on to work and to 
let his family work during long hours and under unhealthy 
conditions. This reacted on the efficiency of the working 
population, and therefore on the net value of their work, and 
therefore it kept down their wages. The employment of chil- 
dren during excessive hours began in the seventeenth century, 
and remained grievous till after the repeal of the corn laws. 

But after the workmen had recognized the folly of attempt- 
ing to revive the old rules regulating industry, there was 
no longer any wish to curtail the freedom of enterprise. The 
sufferings of the English people at their worst were never 
comparable to those which had been caused by the want of 
The new freedom in France before the Revolution ; and it 

EngiJ^rfrom ^^ argued that, had it not been for the strength 
French armies, which England derived from her new industries, 
she would probably have succumbed to a foreign military 
despotism, as the free cities had done before her. Small as her 
population was she at some times bore almost alone the burden 
of war against a conqueror in control of nearly all the re- 
sources of the Continent; and at other times subsidized larger, 
but poorer countries in the struggle against him. Rightly or 
wrongly, it was thought at the time that Europe might have 
fallen permanently under the dominion of France, as she had 
fallen in an earlier age under that of Rome, had not the 

free energy of English industries supplied the sinews of war 
against the common foe. Little was therefore heard in com- 
plaint against the excess of free enterprise, but much against 
that limitation of it which prevented Englishmen from obtain- 
in<r food from abroad in return for the manufactures which 
they could now so easily produce. 

And even trades-unions, which were then beginning that 
brilliant though chequered career which has been more full 
of interest and instruction than almost anything else in 
English history, passed into the phase of seeking little from 
authority except to be left alone. They had learnt by bitter 
experience the folly of attempting to enforce the old rules by 
which Government had directed the course of industry ; and 
they had as yet got no far-reaching views as to the regula- 
tion of trade by their own action : their chief anxiety was to 
increase their own economic freedom by the removal of the 
laws against combinations of workmen. 

§ 3. It has been left for our own generation to perceive 
all the evils which arose from this sudden in- Dangers of a 
crease of economic freedom. Now first are we crease of free- 
getting to understand the extent to which the <*<>"»• 
capitalist employer, untrained to his new duties, was tempted 
to subordinate the wellbeing of his workpeople to his own 
desire for gain; now first are we learning the importance 
of insisting that the rich have duties as well as rights in 
their individual and in their collective capacity; now first 
is the economic problem of the new age showing itself to 
us as it really is. This is partly due to a wider knowledge 
and a growing earnestness. But however wise and virtuous 
our grandfathers had been, they could not have seen things 
as we do ; for they were hurried along by urgent necessities 
and terrible disasters. 

But we must judge ourselves by a severer standard. For 
we arc not now struggling for national existence ; and our 
resources have not been exhausted by great wars : on the con- 


BOOK 1. CH. II. § 3. 



trary our powers of production have been immensely increased ; 
The nation ^T^d, what is at least as important, the repeal of 
is richer, and the Corn Laws and the growth of steam com- 

need not sacri- ... i i i i i ^ • j 

fice everything munication have enabled a largely increased 
to production, population to obtain sufficient supplies of food on 
easy terms. The average money income of the people has 
more than doubled ; while the price of almost all important 
commodities except animal food and house-room has fallen by 
one-half or even further. It is true that even now, if wealth 
were distributed equally, the total production of the country 
would only suffice to provide necessaries and the more urgent 
comforts for the people \ and that as things are, many have 
barely the necessaries of life. But the nation has grown in 
wealth, in health, in education and in morality ; and we are no 
longer compelled to subordinate almost every other consi- 
deration to the need of increasing the total produce of 

In particular during the present generation this increased 
prosperity has made us rich and strong enough to impose 
new restraints on free enterprise; some temporary material 
loss being submitted to for the sake of a higher and greater 
ultimate gain. But these new restraints are different from 
the old. They are imposed not as a means of class domi- 
nation ; but with the purpose of defending the weak, and 
especially children and the mothers of children, in matters 
in which they are not able to use the forces of competition 
in their own defence. The aim is to devise, deliberately and 
promptly, remedies adapted to the quickly changing circum- 
.^tances of modern industry; and thus to obtain the good, 

^ The average income per head in the United Kingdom which was about 
£15 in 1820 is about £37 now ; i.e. it has risen from about £75 to £185 per 
family of five ; and its purchasing-power in terms of commodities is nearly as 
great as that of £400 in 1820. There are not a few artisans' famiUes, the total 
earnings of which exceed £185, so that they would lose by an equal distribution 
of wealth : but even they have not more than is required to sui)port a healthy 
and many-sided life. 


without the evil, of the old defence of the weak that in other 
ages was gradually evolved by custom. And by the aid of the 
telegraph and the jirinting-press, of representa- The influence 
tive government and trade associations, it is of the tele- 
possible for the people to think out for them- printing- 
selves the solution of their own problems. The P*"^^** 
growth of knowledge and self-reliance has given them 
that true self-controlling freedom, which enables them to 
impose of their own free will restraints on their own 
actions ; and the problems of collective production, collective 
ownership and collective consumption are entering on a new 

Projects for great and sudden changes are now, as ever, 
foredoomed to fail, and to cause reaction. "We are still 
unable to move safely, if we move so fast that our new plans 
of life altogether outrun our instincts. It is true that human 
nature can be modified; new ideals, new opportunities and 
new methods of action may, as history shows, alter it very 
nmch even in a few generations. This change in human 
nature has perhaps never covered so wide an area and moved 
so fast as in the present generation. But still it is a 
growth, and therefore gradual ; and changes of our social 
organization must wait on it, and therefore they must be 
gradual too. 

But though they wait on it, they may always keep a little 
in advance of it, promoting the growth of our Movement 
higher social nature by giving it always some towards 
new and higher work to do, some practical ideal fofmrof coi- 
towards which to strive. Thus gradually we may ^«*=t*vism. 
attain to an order of social life, in which the common srood 
overrules individual caprice, even more than it did in the 
early ages before the sway of individualism had begun. But 
unselfishness then will be the offspring of deliberate will, 
though aided by instinct individual freedom then will develop 
itself in collective freedom; — a happy contrast to the old 
M. 2 



BOOK I. CH. II. § 3. 

order of life, in which individual slavery to custom caused 
collective slavery and stagnation, broken only by the caprice 
of despotism or the caprice of revolution. 

We have been looking at this movement from the English 
point of view. But other nations are taking their share in it. 
America faces new practical difficulties with such intrepidity 
and directness that she is already contesting with England the 
leadership in economic affairs ; she supplies many of the most 
instructive instances of the latest economic tendencies of the 
age, such as the growing democracy of trade and industry, and 
the development of speculation and trade combination in every 
form, and she will probably before long take the chief part in 
pioneering the way for the rest of the world. Nor is Australia 
showing less signs of vigour than her elder sister ; she has in- 
deed some advantage over the United States in the greater 
homogeneity of her people. 

On the Continent the power of obtaining important results 
by free association is less than in English speaking countries ; 
and in consequence there is less resource and less thoroughness 
in dealing with industrial problems. But their treatment is 
not quite the same in any two nations : and there is something 
characteristic and instructive in the methods adopted by each 
of them ; particularly in relation to the sphere of governmental 
action. In this matter Germany is taking the lead. It has 
been a great gain to her that her manufacturing industries 
developed later than those of England ; and she has been able 
to profit by England's experience and to avoid many of her 




§ 1. Economics is a study of men as they live and move 
and think in the ordinary business of life. It is ^^^^ ^j^jg^ 
a study of real men, not of fictitious men, or motives of 

(( • )f -Tk J 'j • . tf 1 • n business life 

"economic men." But it concerns itself chiefly have a money 
with those motives which affect, most powerfully ™e*sure. 
and most steadily, man's conduct in the business part of his 
life. Everyone who is worth anything carries his higher 
nature with him into business ; and, there as elsewhere, he is 
influenced by his personal affections, by his conceptions of 
duty and his reverence for high ideals. But, for all that, the 
steadiest motive to business work is the desire for the pay 
which is the material reward of work. The pay may be on 
its way to be spent selfishly or unselfishly, for noble or base 
ends; and here the variety of human nature comes into 
play. But the motive is supplied by a definite amount of 
£. s. d. : and it is this definite and exact money measurement 
of the steadiest motives in business life, which has enabled 
economics far to outrun every other branch of the study 
of man. Just as the chemist's fine balance has made 
chemistry more exact than most other physical sciences ; so 
this economist's balance, rough and imperfect as it is, has made 
economics more exact than any other branch of social science. 
But of course economics cannot be compared with the exact 
physical sciences: for it deals with the ever changing and 
subtle forces of human nature. 

I ^ 

follows the 
practice of 

BOOK I. CH. 111. 

Ill fact the economist only does in a more patient and 
thoughtful way, and with greater precautions, what everybody 
is always doing every day in ordinary life. He does not 
attempt to weigh the real value of the higher affections of 
our nature against those of our lower : he does not balance 
the love for virtue against the desire for agreeable food. 
He estimates the incentives to action by their 
effects just in the same way as people do in com- 
mon life. He follows the course of ordinary 
conversation, differing from it only in taking 
more precautions to make clear the limits of his knowledge 
as he goes. These precautions are laborious, and make some 
people think that economic reasonings are artificial. But 
the opposite is the fact. For he does but bring into promi- 
nence those assumptions and reservations, which everyone 
makes unconsciously every day. 

For instance, if we find a man in doubt whether to spend 
a few pence on a cigar, or a cup of tea, or on riding home 
instead of walking home, then we may follow ordinary usage, 
and say that he expects from them equal gratifications. Again 
if we find that the desires to secure either of two gratifications 
will induce men in similar circumstances each to do just an 
hour's extra work, or will induce men in the same rank of life 
and with the same means each to pay a shilling for it, we then 
may say that those gratifications are equal. 

Next suppose that the person, whom we saw doubting be- 
tween several little gratifications for himself, had thought after 
a while of a poor invalid whom he would pass on his way 
home, and had spent some time in making up his mind whether 
he would choose a physical gratification for himself, or would 
do a kindly act and rejoice in another's joy. As his desires 
turned now towards the one, now the other, there would be 
change in the quality of his mental states. But the economist 
treats them in the first instance merely as motives to action, 
which are shown to be evenly balanced, since they are 



measured by the same sum of money. A study of these 
money values is only the starting-point of economics : but it is 
the starting-point. 

§ 2. Again the desire to earn a shilling is a much stronger 
motive to a poor man with whom money is scarce than to a 
rich one. A rich man, in doubt whetlier to spend a sliilling 
on a single cigar, is weighing against one anotlier smaller 
pleasures than a poor man, who is doubting whether to spend 
a shilling on a supply of tobacco that will last him for a 
month. The clerk with £100 a year will walk to business in 
a heavier rain than the clerk with £300 a year ; for if the 
poorer man spends the money, he will suffer more from the 
want of it afterwards than the richer would. The gratification 
that is measured in the poorer man's mind by sixpence is 
greater than that measured by it in the richer man's mind. 

These difiiculties can however be avoided. For if we take 
averages sufficiently broad to cause the personal Allowance for 
peculiarities of individuals to counterbalance one the different 

* J.1- iU 1 • T_ ^ !> 1 • utilities of 

another, the money winch people of equal incomes money to rich 
will give to obtain a benefit or avoid an injury is *"'^ p®®*"- 
a sufficiently accurate measure of the benefit or the injury. If 
there are a thousand families living in Sheffield and another 
thousand in Leeds, each with about £100 a-year, and a tax 
of £1 is levied on all of them, we may be sure that the 
injury which the tax will cause in Sheffield is very nearly 
equal to that which it will cause in Leeds : and similarly 
anything that increased all the incomes by a £1 would give 
command over very nearly the same amount of additional 
happiness in the two towns. 

Thus "money" or "general purchasing power" or "com- 
mand over material wealth," is the centre around which 
economic science clusters ; this is so, not because 
money or material wealth is regarded as the main motives are 
aim of human effort, nor even as affording the "ot exclusively 

' ^ selfish. 

mam subject-matter for the study of the economist, 



BOOK I. CH. III. § 2. 

but because in this world of ours it is the one convenient 
means of measuring human motive on a large scale ; and if 
the older economists hnd made this clear, they would have 
escaped many grievous misrepresentations. The splendid 
teachings of Carlyle and Ruskin as to the right aims of 
human endeavour and the right uses of wealth, would not 
then have been marred by bitter attacks on economics, based 
on the mistaken belief that that science had no concern 
with any motive except the selfish desire for wealth, or even 
that it inculcated a policy of sordid selfishness. 





§ 1. Tins brings us to consider Economic Lmvs, Every 
cause has a tendency to produce some definite 
result if nothing occurs to hinder it. Thus ^wslffscience 
gravitation tends to make things fall to the are statements 
ground : but when a balloon is full of gas lighter 
than air, the pressure of the air will make it rise in spite of 
the tendency of gravitation to make it fall. The law of 
gravitation states how any two things attract one another; how 
they tend to move towards one another, and will move towards 
one another if nothing interferes to prevent them. The law 
of gravitation is therefore a statement of tendencies. 

It is a very exact statement — so exact that mathe- 
maticians can calculate a Nautical Almanac that _. 

The exact 

will show the moments at which each satellite laws of simple 
of Jupiter will hide itself behind Jupiter. 
They make this calculation for many years beforehand ; and 
navigators take it to sea, and use it in finding out where they 
are. Now there are no economic tendencies which act as 
steadily and can be measured as exactly as gravitation can : 
and consequently there are no laws of economics which can 
be compared for precision with the law of gravitation. 

§ 2. Let us then look at a science less exact tlian 
astronomy. The science of the tides explains 
how the tide rises and falls twice a day under lawsofcom- 
the action of the sun and the moon : how there ^ ^* sciences, 
are strong tides at new and full moon, and weak tides at the 


BOOK I. CH. IV. SS 2, 3. 

•J9J ' 

moon's first and third quarter ; and how the tide running up 
into a closed channel, like that of the Severn, will be very 
high; and so on. Thus, having studied the lie of the land 
and the water all round the British isles, people can calculate 
beforehand when the tide will jyrohably be at its highest on 
any day at London Bridge, or at Gloucester ; and how high it 
will be there. They have to use the word 'probably, which 
the astronomers do not need to use when talking about the 
eclipses of Jupiter's satellites. Why is that? The reason is 
that though many forces act upon Jupiter and his satellites, 
each one of them acts in a definite manner which can be 
predicted beforehand. But no-one knows enough about the 
weather to be able to say beforehand how it will act : and 
a heavy downpour of rain in the Thames valley or a strong 
north-east wind in the German Ocean may make the tides 
at London Bridge differ a good deal from what had been 

§ 3. The laws of economics are to be compared with the 
The science laws of the tides rather than with the simple 
and exact law of gravitation. For the actions of 
men are so various and uncertain, that the best 
statement of tendencies that we can make in a 
science of human conduct, must needs be inexact and faulty. 
This might be urged as a reason against making any state- 
ments at all on the subject ; but to do that would be almost 
to abandon life. Life is human conduct and the thoughts 
that grow up around it. By the fundamental impulses of our 
nature we all — high and low, learned and unlearned — are in 
our several degrees constantly striving to understand the 
courses of human action, and to shape them for our purposes 
whether selfish or unselfish, whether noble or ignoble. And 
since we 7)iu8t form to ourselves some notions of the tendencies 
of human action, our choice is between forming those notions 
carelessly and forming them carefully. The harder the task, 
the greater the need for steady patient inquiry; for turning to 

of man is 
complex and 
its laws are 



account the experience that has been reaped by the more 
advanced physical sciences ; and for framing as best we can well 
thought-out estimates, or provisional laws, of the tendencies of 
human action. 

§ 4. Our plan of work is then this : — We study the 
actions of individuals, but study them in relation to social 
life. We take as little notice as possible of 
individual peculiarities of temper and character, rggarded^a^^ 

We watch the conduct of a whole class of member of an 

people — sometimes the whole of a nation, some- group, 
times only those living in a certain district, more 
often those engaged in some particular trade at some time 
and place : and by the aid of statistics, or in other ways, we 
ascertain how much money on the average the members of 
the particular group we are watching, are just willing to pay 
as the price of a certain thing which they desire, or how much 
must be offered to them to induce them to undergo a certain 
effort or abstinence that they dislike. The measurement of 
motive thus obtained is not indeed perfectly accurate ; for 
if it were, economics would rank with the most advanced of 
the physical sciences; and not, as it actually does, with the 
least advanced. 

But yet the measurement is accurate enough to enable 
experienced persons to forecast fairly well the extent of the 
results that will follow from changes in which motives of this 
kind are chiefly concerned. Thus, for instance, they can 
estimate very closely the payment that will be required to 
produce an adequate supply of labour of any grade, from the 
lowest to the highest, for a new trade which it is proposed to 
start in any place. And, when they visit a factory of a kind 
that they have never seen before, they can tell within a 
shilling or two a week what any particular worker is earning, 
by merely observing how far his is a skilled occupation and 
what strain it involves on his physical, mental and moral 



4, 5. 



deal mainly 
^th one side 
of life but not 
the life of a fie 
titious being. 

And, starting from simple considerations of this kind, 
they can go on to analyse the causes which govern the local 
distribution of different kinds of industry, the terms on which 
people living in distant places exchange their goods with one 
another, and so on. They can explain and predict the ways 
in which fluctuations of credit will affect foreign trade, or 
again the extent to which the burden of a tax will be shifted 
from those on w^hom it is levied on to those for whose wants 
they cater, and so on. 

In all this economists deal with man as he is : not with an 
abstract or " economic " man ; but a man of flesh and blood ; 
one who shapes his business life to a great extent 
with reference to egoistic motives ; but also one 
who is not above the frailties of vanity or reck- 
lessness, and not below the delight of doing his 
work well for its own sake ; who is not below the 
delight of sacrificing himself for the good of his family, his 
neighbours, or his country, nor below the love of a virtuous 
life for its own sake. 

§ 5. Thus then a law of social science, or a Social Law, 

is a statement of social tendencies ; that is, a 

' law ' ' social ' Statement that a certain course of action may 

be expected under certain conditions from the 

members of a social group. 

Economic laws, or statements of economic tendencies, are 
and 'econo- social laws relating to branches of conduct in 
mic' which the strength of the motives chiefly con- 

cerned can be measured by a money price. 

Corresponding to the substantive " law " is the adjective 
" legal." But this term is used in connection with " law " 
in the sense of an ordinance of government ; not in connec- 
tion with scientific laws of relation between cause and effect. 
The adjective used for this purpose is derived from "norma," 
a term which is nearly equivalent to " law " ; and we 
say that the coui-se of action which may bo expected under 

t \^ 



certain conditions from the members of an industrial group 
is the normal action of the members of that Normal 
group relatively to those conditions. action. 

Normal action is not always morally right; very often it 
is action which we should use our utmost efforts to stop. 
For instance, the normal condition of many of the very 
poorest inhabitants of a large town is to be devoid of 
enterprise, and unwilling to avail themselves of the oppor- 
tunities that may offer for a healthier and less squalid life 
elsewhere ; they have not the strength, physical, mental and 
moral, required for working their way out of their miser- 
able surroundings. The existence of a considerable supply of 
labour ready to make match-boxes at a very low rate is 
normal in the same way that a contortion of the limbs is 
a normal result of taking strychnine. It is one result, a 
deplorable result, of the action of those laws which we have 
to study. 

The earlier English economists paid almost exclusive at- 
tention to the motives of individual action. 
But it must not be forgotten that economists, i^c°ite*act°ion! 
like all other students of social science, are 
concerned with individuals chiefly as members of the social 
organism. As a cathedral is something more than the stones 
of which it is built, as a person is something more than a 
series of thoughts and feelings, so the life of society is some- 
thing more than the sum of the lives of its individual members. 
It is true that the action of the whole is made up of that of 
its constituent parts ; and that in most economic problems the 
best starting-point is to be found in the motives that affect the 
individual, regarded not indeed as an isolated atom, but as a 
member of some particular trade or industrial group ; but it is 
also true, as German writers have well urged, that economics 
has a great and an increasing concern in motives connected 
with the collective ownership of property and the collective 
pursuit of important aims. Many new kinds of voluntary 


BOOK I. CH. IV. § 5. 


association are growing up under the influence of other 
motives besides that of pecuniary gain ; and the Co-operative 
movement in particular is opening to the economist new 
opportunities of measuring motives whose action it had seemed 
impossible to reduce to any sort of law\ 

1 For a coutiimatioii of this subject see Appendix A on Methods of Study. 







§ 1. The laws, or statements of tendency, with which we 
shall be chiefly concerned in this volume, are Tendencies 
those relating to man's Wants and their satisfac- -3*-die'Jj7_vi 
tion, to the Demand for wealth audits Consump- 
tion (Book III) ; to its Production, especially under the modern 
organization of industry (Book IV) ; to some of those general 
relations between the demand for a thing, and the difticulty 
of providing a supply of it which govern Value (Book V) ; and 
(Book VI) to Exchange in relation to the Distribution of 
the income of the nation between those who work with their 
heads or hands, those who store up capital to provide 
machinery and other things that will make labour more 
efficient, and landowners ; or which is nearly the same thing 
the broad features of the problem of wages, profits and rent. 

The present volume deals mainly with the Economics of 
Industry. A later volume will deal with the Economics of 
Trade and Finance. It will discuss systems of money, credit 
and banking; the organization of markets, the relation 
between wholesale and retail prices ; foreign trade ; taxes and 
other ways and means of collective action ; and lastly public 
responsibilities and the general functions of collective action 
in economic affairs, whether through the Government, through 
the form of opinion, or through voluntary co-operation. 

§ 2. Economics is thus taken to mean a study of the 
economic aspects and conditions of man's political, social and 




I. CH. V. § 2. 

Aims of the 

private life ; but more especially of his social life. The aims 
of the study are to gain knowledge for its own 
sake, and to obtain guidance in the practical 
conduct of life, and especially of social life ; 
the need for such guidance was never so urgent as now. 

It would indeed be a mistake to be always thinking 
His first duty ^^ ^^® practical purposes of our work, and 
isjo^discover planning it out with direct reference to them. 
For by so doing we are tempted to break off 
each line of thought as soon as it ceases to have immediate 
bearing on that particular aim which we have in view at 
the time : the direct pursuit of practical aims leads us to 
group together bits of all sorts of knowledge, which have 
no connection with one another except for the immediate 
purposes of the moment, and throw but little light on 
one another. Our mental energy is spent in going from 
one to another ; nothing is thoroughly thought out ; no real 
progress is made. The grouping, therefore, which is best for 
the purposes of science is thait which collects together all 
those facts and reasonings which are similar to one another in 
nature : so that the study of each may throw light on its 

And yet it may be well to have before us at starting 
Butthedirec- ^^™® tolerably clear notion of the practical 
seTrch ari' problems which supply the chief motive to the 
indicated by study of the modern economist. Many of them 

prfbrems.""*' ^^ "^""^ ^^^ ^"^^^ ^i^^i^ ^^e range of his science, 
and none of them can ))e fully answered by mere 
science : the ultimate resolve must always lie with conscience 
and common sense. But the following are some of the 
chief issues which are of special urgency in England in our 
own generation, and to which economics can contribute some 
important material of carefully arranged facts and well con- 
sidered arguments : — 

How should we act so as to increase the good and diminish 





the evil influences of economic freedom, both in its ultimate 
results and in the course of its progress 1 If the first are 
good and the latter evil, but those who suffer the evil do not 
reap the good, how far is it right that they should suffer for 
the benefit of others ? 

Taking it for granted that a more equal distribution of 
wealth is to be desired, how far would this justify changes in 
the institutions of property, or limitations of free enterprise 
even when they would be likely to diminish the aggregate of 
wealth ? In other words, how far should an increase in the 
income of the poorer classes and a diminution of their work 
be aimed at, even if it involved some lessening of national 
material wealth 1 How far could this be done without in- 
justice, and without slackening the energies of the leaders 
of progress? How ought the burdens of taxation to be 
distributed among the different classes of society? 

Ought we to rest content with the existing forms of 
division of labour? Is it necessary that large numbers of 
the people should be exclusively occupied with work that has 
no elevating character ? Is it possible to educate gradually 
among the great mass of workers a new capacity for the 
higher kinds of work; and in particular for undertaking 
co-operatively the management of the businesses in which 
they are themselves employed ? 

What are the proper relations of individual and collective 
action in a stage of civilization such as ours ? How far ought 
voluntary association in its various forn)s, old and new, to 
be left to supply collective action for those purposes for 
which such action has special advantages? What business 
affairs should be undertaken by society itself acting through 
its Government, imperial or local? Have we, for instance, 
carried as far as we should the plan of collective ownership 
and use of open spaces, of works of art, of the means of 
instruction and amusement, as well as of those material re- 
quisites of a civilized life, the supply of which requires united 
action, such as gas and water, and railways ? 




When Government does not itself directly intervene, how 
far should it allow individuals and corporations to conduct 
their own ali'airs as they please ? How far should it regulate 
the management of railways and other concerns which are 
to some extent in a position of monopoly, and again of land 
and other things the quantity of which cannot be increased 
by man 1 Is it necessary to retain in their full force all the 
existing rights of property ; or have the original necessities 
for which they were meant to i)rovide, in some measure 
passed away ? 

Are the prevailing methods of using wealth entirely 
justifiable ] What scope is there for the moral pressure of 
social opinion in constraining and directing individual action 
in those economic relations in which the rigidity and violence 
of Government interference would be likely to do more harm 
than good ? 

In what respect do the duties of one nation to another 
in economic matters differ from those of members of the 
same nation to one another ? 







§ 1. Since Economics is the study of man's actions in the 
ordinary affairs of life, it needs to borrow more 
than other sciences do from common experience. ?JSon7n°' 
Its reasonings must therefore be expressed in ^'^^"o'nics. 
language that is intelligible to the general public; it must 
endeavour to conform itself to the familiar terms of every- 
day life, and, so far as possible, to use them as they are com- 
monly used. 

But unfortunately almost every word in common use 
has several shades of meaning, and therefore needs te be 
mterpreted by the context. Economists must take as- the 
standard use of their words, that which seems most in 
harmony with every day usage in the market place: and 
they must add a little special interpretation wherever it 
IS necessary. For by this means only can they say exactly 
what they want to say without perplexing the general 






§ 1. Our difficulties begin at once. "Wealth" is really 
the same word as well-being : but in its common use it means 
only material possessions of different kinds. Further "a 
wealthy man" is a person who has a great deal of wealth: 
and so economists have sometimes been blamed for speaking 
of the "wealth" of the labourer. It is argued that as he is 
not wealthy, he cannot properly be said to possess wealth. 
But this objection must be set aside : and we must persist in 
saying that the cottager's furniture, and other household 
goods constitute his little stock of wealth. 

This word "goods" is a useful one. A man's goods are 
commonly understood to be his material posses- 
sions. But the word is often used more broadly ; 
as when we say it is a great good to a man to be able to find 
recreation in reading or music after his day's work is done. 
This use of the word has been adopted by economists of other 
countries : it is practically very convenient ; and it is suffi- 
ciently in accordance with popular usage in this country for 
us to adhere to it. 

Thus then Goods are all desirable things, all things that 
satisfy human wants. 

All wealth consists of things that satisfy wants, directly or 
indirectly. All wealth therefore consists of desirable things 
or " goods " ; but not all goods are reckoned as wealth. The 
affection of friends, for instance, is a very important element 
of well-being, but it is not ever reckoned as wealth, except by 



a poetic licence. Let us begin by classifying goods, and 
then consider which of them should be accounted as elements 
of wealth. 

Desirable things are Material, or Personal and Non- 
material. Material goods consist of useful r^, c . 

. 1 /. 1 t.lassincation 

material things, and of all rights to hold, or of goods. 
use, or derive benefits from material things, or to receive 
them at a future time. 

Thus they include the physical gifts of nature, land and 
water, air and climate; the products of agriculture, mining, 
fishing, and manufacture; buildings, machinery, and imple- 
ments; mortgages and other bonds; shares in public and 
private companies, all kinds of monopolies, patent-rights, 
copyrights; also rights of way and other rights of usage. 
Lastly, opportunities of travel, access to good scenery, museums, 
ike, ought, strictly speaking, to be reckoned under this head. 

A man's non-material goods fall into two classes. One 
consists of his own qualities and faculties for action and for 
enjoyment; such for instance as that faculty of deriving 
recreation from reading or music, to which we have just 
referred. All these lie within himself and are called m- 
temal. The second class are called external because they 
consist of relations beneficial to him with other people. Such, 
for instance, were the labour dues and personal services of 
various kinds which the ruling classes used to require from 
their serfs and other dependents. But these have passed 
away ; and the chief instances of such relations beneficial to 
their owner now-a-days are to be found in the good will and 
business connection of traders and professional men. 

Again, goods may be transferable or non-transferable. Every 
thing that can be bought or sold is of course transferable. 
But a person's " internal " faculties for action and enjoyment 
are non-transferable. A successful tradesman or medical prac- 
titioner may sell the goodwill of his business. But at first, at 
all events, the business will not be as good to the new comer 



BOOK II. CII. II. §§ 1, 2, 3. 

as it was to him; because part of his business connection 
depended on personal trust in him; and that was non- 

Those goods &.tq free^ which are not appropriated and are 
afforded by Nature without requiring the effort of man. The 
land in its original state was a free gift of nature. But in 
settled countries it is not a free good from the point of view 
of the individual. Wood is still free in some Brazilian forests : 
the iisli of the sea are free generally : but some sea fisheries 
are jealously guarded for the exclusive use of members of a 
certain nation, and may be classed as national property. 
Oyster beds that have been planted by man are not free in 
any sense. Those that have grown naturally are free in every 
sense if they are not appropriated : if they are private property, 
they are still free gifts from the point of view of the nation ; 
but, since the nation has allowed its rights in them to become 
vested in individuals, they are not free from the point of view 
of the individual; and the same is true of private rights of 
fishing in rivers. The wheat grown on free land and the fish 
caught in free fisheries are not free; for they have been 
acquired by labour. 

§ 2. When a man's wealth is spoken of simply, and with- 
out any interpretation clause in the context, it is 
to be taken to consist of two classes of goods. 

In the first class are those material goods to which he has 
(by lav/ or custom) private rights of property. These include 
not only such things as land and houses, furniture and 
machinery, and other material things which may be in his single 
private ownership ; but also any shares in public companies, 
bonds, mortgages and other obligations which he may hold 
requiring others to pay money to him. On the other hand, 
the debts which he owes to others may be regarded as negative 
wealth ; and they must be subtracted from his total posses- 
sions before his true Net wealth can be found. It is perhaps 
hardly necessary to say that services and other goods, which 



pass out of existence in the same instant that they come 
into it, do not contribute to the stock of wealth, and may 
therefore l)e left out of our account. 

In the second class are those of his non-material goods 
which are external to him, and serve directly as the means of 
enabling him to acquire material goods. Thus it excludes all 
his own personal qualities and faculties, even those which 
enable him to earn a living. But it includes his business or 
professional practice, and especially that "goodwill," which 
can be transferred by sale to a new comer. 

It is^rue that, pursuing the lines indicated by Adam Smith 
and followed by most continental economists, we 
might define Personal Wealth so as to include P«*"sonai 
all those energies, faculties, and habits which 
directly contribute to making people industrially efficient. 
But confusion would be caused by using the term " wealth " 
simply when we desire to include a person's industrial 
qualities. For this purpose it will be best to use the more 
explicit phrase "material and personal wealth." "Wealth" 
simply should always mean external wealth only. 

§ 3. We have still to take account of those of a man's goods 
which are common to him with his neighbours; and which there- 
fore it would be a needless trouble to mention when comparing 
his wealth with theirs. But these goods may be important 
for some purposes, and especially for comparisons between the 
economic conditions of distant places or distant times. 

They consist of the benefits which he derives from being a 
member of a certain State or community. They include civil 
and military security, and the right and opportunity to make 
use of public property and institutions of all kinds, such as 
roads and gaslight ; and they include rights to justice or to 
a free education, <fec. The townsman and the countryman 
have each of them for nothing many advantages which the 
other either cannot get at all, or can get only at great expense. 
Other things being equal, one person has more real wealth in 


BOOK ir. CH. II. §§ 3, 4. 

its broadest sense thiiii another, if the place in wliich the 
former lives has a better climate, better roads, better water, 
more wholesome drainage, and cheaper and better newspapers, 
and places of amusement and instruction. House-room, food 
and clothing, which would be insufficient in a cold climate, may 
be abundant in a warm climate : on the other hand, that 
warmth which lessens men's physical needs, and makes them 
rich with but a slight provision of material wealth, makes 
them poor in the energy that procures wealth. 

Many of these things are collective goods ; i.e. goods which 
are not in private ownership. And this brings 

^oods**^^ us to consider wealth from the Social, as opposed 
to the Individual point of view. 

The most obvious forms of such wealth are public material 
property of all kinds, such as roads and canals, buildings and 
parks, gasworks and waterworks ; though unfortunately many 
of them have been secured not by public savings, but by pnblic 
borrowings, and there is the heavy "negative" wealth of a 
large debt to be set against them. 

The Thames has added more to the wealth of England 
than all its canals, and perhaps even than all its railroads. 
And, though the Thames is a free gift of nature, except in 
so far as its navigation has been improved, while the canal is 
the work of man, we ought for many purposes to reckon 
the Thames a part of England's wealth. Again, German 
economists delight to insist that the organization of a free 
and well-ordered State is an element of national wealth. 

National wealth includes the individual as well as the 
collective property of its members. And in estimating the 
aggregate sum of their individual wealth, we may save some 
trouble by omitting all debts and other obligations due to one 
member of a nation from another. For instance, so far as the 
English national debt and the bonds of an English railway 
are owned within the nation, we can adopt the simple plan of 
counting the railway itself as part of the national wealth, and 



neglecting Government and railway bonds altogether. But 
we still have to deduct for those bonds, &c., issued by the 
English Government or by private Englishmen, and held by 
foreigners ; and to add for those foreign bonds, tkc, held by 

§ 4. The notion of Value is intimately connected with 
that of Wealth ; and a little may be said about 
it here. "The word value" says Adam Smith ^^"^* 
"has two different meanings, and sometimes expresses the 
utility of some particular object and sometimes the power 
of purcl;iasing other goods which the possession of that object 
conveys." But experience has shown that it is not well to 
use the word in the former sense. 

The value, that is the exchange value, of one thing in 
terms of another at any place and time, is the amount of that 
second thing which can be got there and then in exchange for 
the first. Thus the term value is relative, and expresses the 
relation between two things at a particular place and time. 

Civilized countries generally adopt gold or silver or both 
as money. Instead of expressing the values of lead and tin, 
and wood, and corn and other things in terms of one another, 
we express them in terms of money in the first instance ; and 
call the value of each thing thus expressed its price. If we 
know that a ton of lead will exchange for fifteen sovereigns 
at any place and time, while a ton of tin will exchange for 
ninety sovereigns, we say that their prices then and there are 
£15 and £90 respectively, and we know that the value of a 
ton of tin in terms of lead is six tons then and there. 

The price of every thing rises and falls from, time to 
time and place to place; and with every such change the 
purchasing power of money changes so far as that thing goes. 
If the purchasing power of money rises with regard to some 
things, and at the same time falls equally with regard to 
equally important things, its general purchasing power (or 
its power of purchasing things in general) has remained 




II. § 4. 

stationary. This phrase conceals some difficulties, which we 
must study later on. But meanwhile we may take it in its 
popular sense, whijh is sufficiently clear; and we may 
throughout this volume neglect possible changes in the general 
purchasing power of money. Thus the price of anything will 
be taken as representative of its exchange value relatively to 
things in general, or in c»ther words as representative of its 
general purchasing power. 





§ 1. Man cannot create material things. In the mental 
and moral world indeed he may produce new 
ideas ; but w^hen he is said to produce material d^ce ll^y^^°' 
things, he really only produces useful results or "*"'ties 
" utilities " ; or, in other words, his effi)rts and sacrifices result 
in changing the form or arrangement of matter to adapt 
it better for the satisfaction of wants. All that he can do 
in the physical world is either to re-adjust matter so as to 
make it more useful, as when he makes a log of wood into 
a table ; or to put it in the way of being made more useful 
by nature, as when he puts seed where the forces of nature 
will make it burst out into life. 

It is sometimes said that traders do not produce : that 
while the cabinet-maker produces furniture, the furniture- 
dealer merely sells what is already produced. But there is no 
scientific foundation for this distinction. They both produce 
utilities, and neither of them can do more : the furniture- 
dealer moves and re-arranges matter so as to make it more 
serviceable than it was before, and the carpenter does nothing 
more. The sailor or the railway-man who carries coal above 
ground produces a further utility, just as much as the miner 
who carries it underground ; the dealer in fish helps to move 
on fish from where it is of comparatively little use to where 
it is of greater use, and the fisherman does no more. It is 
true that there are often more traders than are necessary to 
do the work; and whenever that is the case, there is waste. 
But there is also waste if there are two men to a plough 
which can be well worked by one man : in. both cases all 
those who are at work are productive; though they may 
produce but little. 





BOOK II. CH. III. §§ 1, 2, 3. 

and can con- 
sume only 

Comumjition may bo regarded as negative production. 
Just as man can produce only " utilities," so he 
can consume nothing more. He can produce ser- 
vices and other immaterial products, and he can 
consume them. But as his production of material products is 
really nothing more than a rearrangement of matter which 
gives it new utilities; so his consumption of them is nothing 
more than a disarrangement of matter, which lessens or 
destroys its utilities. Often indeed when he is said to con- 
sume things, he does nothing more than to hold them for his 
use, while, as Senior says, they "are destroyed by those 
numerous gradual agents which we call collectively time" 
As the "producer" of wheat is he who puts seed where Nature 
will make it grow, so the "consumer" of pictures, of curtains 
and even of a house or a yacht does little to wear them out 
himself ; but he holds them and uses them while time wastes 

§ 2. All labour is directed towards producing some effect. 
Nearly all ^^^ though some exertions are taken merely for 
labour is in their own sake, as when a game is played for amuse- 
ment, they are not counted as labour. Jevons 
well defined labour as any exertion of mind 
or body undergone partly or wholly with a view to some 
good other than the pleasure derived directly from the 
work. If we had to make a fresh start it would be best 
to regard all labour as productive except that which failed 
to promote the aim towards which it was directed, and so 
produced no utility. And, on the whole, "Productive" when 
used by itself as a technical term leads to more trouble than 
it is worth. "Productive of" really means "that which 
produces " ; and the only safe course is to finish the phrase, 
and say straight out what it is that is produced. For instance 
we may speak of labour as j^roductive of material wealth, of 
necessaries, tkc. 

3. This brings us to consider the term Necessaries. 

some sense 



It is common to divide wealth into Necessaries, Comforts 
and Luxuries ; the first class including all things required to 
meet wants which must be satisfied, while the latter consist 
of things that meet wants of a less urgent character. But 
here again there is a troublesome ambiguity. When we say 
that a want m,ust be satisfied, what are the consequences 
which we have in view if it is not satisfied 1 Do they include 
death % Or do they extend only to the loss of strength and 
vigour % In other words, are Necessaries the things which are 
necessary for life, or those which are necessary for efficiency 1 

The older use of the term Necessaries was limited to those 
things which were sufficient to enable the labour- 
ers, taken one with another, to support them- forexUtence, 
selves and their families. But we now recognise *"'* ^°^ ^^' 
that a distinction must be made between the 
necessaries for efficiency and the necessaries for existence ; 
and that there is for each rank of industry, at any time and 
place, a more or less clearly defined income which is necessary 
for merely sustaining its members; while there is another 
and larger income which is necessary for keeping it in full 

Thus in the South of England population has increased 
during the present century at a fair rate, allowance being 
made for migration. But the efficiency of labour, which in 
earlier times was as high as that in the North of England, 
has sunk relatively to the North; so that the low-waged 
labour of the South is often dearer than the more highly paid 
labour of the North. This indicates that the labourers in 
the South have had the bare necessaries for existence and 
the increase of numbers, but they have not had the necessaries 
for efficiency. 

It may be true that the wages of any industrial class 
might have sufficed to maintain a higher efficiency, if they 
had been spent with perfect wisdom. But every estimate of 
necessaries must be relative to a given place and time; and 


BOOK II. CH. IJI. § 3. 



unless there be a special interpretation clause to the contrary, 
it may be assumed that the wages will be spent with just 
that amount of wisdom, forethought, and unselfishness, which 
prevails in fact among the industrial class under discussion. 
With this understanding we may say that the income of any 
class in the ranks of industry is below its necessary level, 
when any increase in their income would in the course of 
time produce a more than proportionate increase in their 
efficiency. Consumption may be economized by a change of 
habits ; but any stinting of necessaries is wasteful. 

The necessaries for the efficiency of an ordinary agricul- 
tural or of an unskilled town labourer and his family, in 
England in this generation, may be said to consist of a well- 
drained dwelling with several rooms, warm clothing, with 
some changes of under-clothing, pure water, a plentiful supply 
of cereal food, with a moderate allowance of meat and milk, and 
a little tea, ifec, some education and some recreation, and lastly, 
sufficient freedom for his wife from other work to enable her 
to perform properly her maternal and her household duties. 
If in any district unskilled labour is deprived of any of these 
things, its efficiency will suffer in the same way as that of a 
horse that is not properly tended, or a steam-engine that has 
an inadequate supply of coals. All consumption up to this 
limit is strictly productive consumption : any stinting of this 
consumption is not economical, but wasteful. 

In addition, perhaps, some consumption of alcohol and 
Conventional tobacco, and some indulgence in fashionable dress 
necessaries. ^re in many places so habitual, that they may be 
said to be conventionally necessary, since in order to obtain 
them, the average man and woman will sacrifice some things 
which are necessary for efficiency. Their wages are therefore 
less than are practically necessary for efficiency, unless they 
provide not only for what is strictly necessary consumption, 
but include also a certain amount of conventional necessaries. 



§ 1. It is customary to divide the stock of goods which 
constitutes wealth into that which is and that which is not 
capital. But the purposes for which the division is wanted are 
many and various ; and in consequence the term Capital has 
many uses both in the language of the market-place and 
in the writings of economists. In fact there is no other 
part of economics in which the temptation is so stron<y to 
invent a completely new set of terms. But this would throw 
the science out of touch with real life. We must therefore 
take the ordinary usages of the term as the foundation of our 
account; and add such explanations, as are required to give 
to our use of the term some measure of clearness and precision. 

Adam Smith said that a person's capital is that part of 
his stock from which he expects to derive an income; 
and in fact each use of the term capital has cor- yields 
responded more or less closely to one of the uses »ncome. 
of the term Income; and there is an advantage in studyino- 
the two terms Capital and Income together. 

In a primitive community no distinction is made between 
capital and other forms of wealth : each family is 
nearly self-sufficing, and provides most of its own its broad" 
food and clothing and even household furniture. "*^" 
Only a very small part of the income, or comings in, of the 


BOOK II. CH. IV. §§ 1, 2. 

to ' money- 

family are iii the form of money ; when one thinks of their 
income at all, one reckons in the benefits which they get from 
their cooking utensils just as much as those which they get 
from their plough : one draws no distinction between their 
capital and the rest of their accumulated stock, to which the 
cooking utensils and plough alike belong. 

But with the growing use of money in common life the notion 

of income has been more and more confined to 

correspondL^ those comings in which are in the form of money; 

or else^like the free use of a house, the free 

coals, gas, water, tfec, of some employees — take 

the place of things on which most people spend a part of 

their money- income. 

In harmony with this meaning of Income, the language of 
the market-place commonly regaixis a man's capital as that 
part of his wealth which he devotes to acquiring an income 
in the form of money; or, more generally, to acquisition 
by means of trade. It may be convenient sometimes to speak 
of this as his Trade capital ; which may be defined to consist 
of those things which a person uses in his trade, such as the 
factory and the business plant of a manufacturer ; that is, his 
machineiy, his raw material, any food, clothing, and house- 
room that he may hold for the use of his employees, and the 
goodwill of his business. And of course we must add to the 
things in his possession those to which he has a right and 
from which he is drawing income : including loans which he 
has made on mortgage or in other ways, and all the command 
over capital which he may hold in the form of shares of railway 
companies, <fec., and again of money which he may keep with 
his banker. On the other hand debts owed by him must be 
deducted from his capital. This may be taken as the standard 
use of Capital for the purposes of business life. 

§ 2. But a broader use is needed when we come to regard 
Social capital from the point of view, not of the indi- 
capitai. vidual, but of Society as a whole; or, in other 



words, when we seek for a definition of capital in general, or 
Social Capital. 

The chief difference relates to land, and other free gifts 
of nature. The balance of usage and convenience land is 
is in favour of reckoning rights to land as part of on^>"ed. 
individual capital. But when regarding capital from the social 
point of view it is best to put under separate heads those of 
the nation's resources which were made by man, and those 
which were not; and to separate the capital which is the 
result of labour and saving from those things which nature 
has given freely. 

This plan is well adapted for the main purposes of the 
economist. For indeed his chief concern with capital in 
general, or social capital, is when he is considering the way 
in which the three agents of production, land {i.e. natural 
agents), labour and capital, contribute to producing the national 
income (or the National Dividend, as it will be called later 
on) ; and the way in which this is distributed among the three 

This fact points further to the convenience of keeping up 
a close relation between our uses of the terms Capital and 
Income from the point of view of society as we did from tliat 
of the individual. But of course income is now to be treated 
more broadly and not strictly limited to that which takes the 
form of money. All wealth is designed to yield what in pure 
theory may be called an In-come of benefit or gain in some 
form or other ; and the language of the market-place, while 
refusing to admit so broad a use of the term Income as that, 
commonly includes a certain number of forms of income,, other 
than money income. 

This use is exemplified in the rules of the income-tax 
commissioners, who count in everything which is commonly 
treated in a business fashion ; even though it may happen, 
like a dwelling-house inhabited by its owner, to yield its 
income of comfort directly. That is done partly because of 


BOOK 11. CH. IV. 5§ 2, 3. 




the practical importance of house-room, and partly because 
the real income from it can easily be separated off and esti- 

In the present treatise therefore, capital in general, i.e. 
capital regarded from the social point of view, will be taken 
to consist of those kinds of wealth, other than the free gifts 
of nature, which yield income that is generally reckoned as 
such in common discourse: together with similar things in 
public ownership, such as government factories. 

Thus it will include all things held for trade purposes, 
whether machinery, raw material or finished goods ; theatres 
and hotels, home farms and houses: but not furniture or 
clothes owned by those who use them. For the former are, 
and the latter are not commonly regarded by the world at 
large as yielding income. 

3. It is troublesome to have to use the word Capital 
in two senses so different as those of the two 
preceding sections. But it cannot be helped. 
The use of the word to mean Trade-capital is well 
adapted for many purposes of economic inquiry, 
as well as for the practical needs of business. 
And it is so firmly established in the market-place that there 
would be no wisdom in an attempt to dislodge it. 

But the second use of the word to mean "Social capital" is 
equally necessary in its place. That use, or one differing from 
it only in small matters of detail, has been the chief use of 
the term in their most important discussions by the economists 
of all countries from the dawnings of economic science till 
now. And it is very often used by business men and states- 
men in broad discussions of public well-being; so it also is 

In ordinary conversation people are apt to pass from one 
use of the word to the other, without noticing the change. 
This causes confusion, which can sometimes be set right at 
once, by someone's breaking in and asking "are you speaking' 

uses of the 
term Capital. 




of capital in a broader sense than before," or "in a narrower 
sense" as the case may be. But the economist cannot afford 
to run the risk of confusions of this kind. He must always 
make quite sure that he knows what he means himself ; and 
he must not trust to someone's interrupting him and asking 
him to explain himself. And this makes it seem as though he 
were introducing new difiiculties that are not met with in 
common conversation. But that is not the case. He does not 
make new difficulties. He merely brings into prominence some 
that are latent in every day discourse. The trouble of examin- 
ing them in a good light is worth what it costs ; for it saves 
constant confusion of thought. 

Finally it should be remarked that though there is no 
perfectly clear and consistent tradition as to the verbal defini- 
tion of capital ; there is a clear tradition that we should use 
the term Wealth in preference to Capital when our attention 
is directed to the relations in which the stock of useful things 
stands to general well-being, to methods of consumption, and 
to pleasures of possession : and that we should use the term 
Capital when our attention is directed to those attributes of 
productiveness and prospectiveness, which attach to all the 
stored-up fruits of human effort, but are more prominent in 
some than in others. We should speak of Capital when con- 
sidering things as agents of production ; and we should speak 
of Wealth when considering them as results of production, as 
subjects of consumption and as yielding pleasures of possession ^ 

1 These differences of opiuion among economists as to the best definition 
of capital seem very confusing. But they are of much less importance 
practically than appears at first sight. For instance, whatever definition of 
capital be taken, it is true that a general increase of capital augments the 
demand for labour and raises wages : and, whatever definition be taken, it is 
not tnie that all kinds of capital act with equal force in this direction, or that 
it is possible to say how great an effect any given increase in the total amount 
of capital will have in raising wages, without specially inquiring as to the 
particular form which the mcrease has taken. This inquiry is the really 
important part of the work : it has to be made, and it is made by all careful 
writers in very much the same manner, and it comes to the same result, 
whatever be the definition of capital with which we have started. 




1 ! , 


BOOK II. CH. IV. ^ 4, 5, G. 

§ 4. Capital has been classed as conmwiption capital^ and 
auxiliary or instrumental capital. It seems necessary to retain 
this distinction because it is often used. But it is not a good 
one : no clear line of division can be drawn between the two 
classes. The general notion of the distinction which the terms 
are designed to suggest, can however be gathered from the 
following approximate definitions. 

Co7isumptio7i capital consists of goods in a form to satisfy 
Consumption Wants directly ; that is, goods which afford a direct 
capital. sustenance to the workers, such as food, clothes, 

house-room, &c. 

Auxiliary J or instrumental^ capital is so called because 
Auxiliary it consists of all the goods that aid labour in 

capital. production. Under this head come tools, machines, 

factories, railways, docks, ships, <fec. ; and raw materials of all 

But of course a man's clothes assist him in his work and 
are instrumental in keeping him wann ; and he derives a 
direct benefit from the shelter of his factory as he does from 
the shelter of his house. 

Next we may follow Mill in distinguishing circulating 
Circulatine capital "which fulfils the whole of its oftice in 
the production in which it is engaged, by a 
single use," ivom fixed capital "which exists in a 
durable shape and the return to which is spread over a period 
of corresponding duration." 

Sometimes again we have to distinguish certain forms of 
Specialized capital as S2)ecialized ; because, having been de- 
capitai. signed for use in one trade, they cannot easily be 

diverted to another. 

Both of these distinctions correspond to differences in 
degree, not to hard and sharp lines of division. 

§ 5. To return to Income. If a person is engaged in busi- 
ness, he is sure to have to incur certain outgoings for raw 
material, the hire of labour, &:c. And, in that case, his true 

and fixed 






or iTeiJ Income is found by deducting from his gross income the 
outgoings that belong to its production. Net income. 

Now anything that a person does, for which he is paid 
directly or indirectly in money, helps to swell his money 
income; while no services that he performs for himself are 
reckoned as adding to his nominal income. TJius a woman 
who makes her own clothes, or a man who digs in his own 
garden or repairs his own house, is earning income just 
as would the dressmaker, gardener or carpenter who might 
be hired to do the work. 

It would be a great convenience if there were two words 
available: one to represent a person's total income and an- 
other his money income, i.e. that part of his total income 
which comes to him in the form of money. For scientific pur- 
poses it would be best that the word income when occurring 
alone should always mean total real income. But as this plan 
is inconsistent with general usage we must, whenever there is 
any danger of misunderstanding, say distinctly whether the 
term is to be taken in its narrower or its broader use. 

In this connection we may introduce a term of which 
we shall have to make frequent use hereafter. Netadvan- 
The need for it arises from the fact that every ^ages. 
occupation involves other disadvantages besides tlie fatigue 
of the work required in it, and every occupation offers other 
advantages besides the receipt of money wages. The true 
reward whicli an occupation offers to labour has to be calcu- 
lated by deducting the money value of all its disadvantages 
from that of all its advantages; and we may describe this 
true reward as the J!^et Advantages of the occupation. 

§ 6. The income derived from wealth has many forms. It 
includes all the various benefits which a person derives from 
the ownership of wealth whether he uses it as capital or 
not. Thus it includes the benefits which he gets from the 
use of liis own piano, equally with those which a piano dealer 
would wm by letting out a piano on hire. And it includes, 


li ( 


BOOK II. CH. IV. §§ 6, 7. 

as a special case, the money income which is derived from 
capital. This income is most easily measured when it takes 
Interest of the form of a payment made by a borrower for 
capital. ^jjg ygg (jf Q^ Iq^jj fQj.^ gg^y^ a^ year; it is then 

expressed as the ratio which that payment bears to the loan, 
and is called Interest. 

This is one of a group of notions, which we shall need to 
study carefully hereafter, but of which provisional definitions 
may conveniently be introduced here. 

When a man is engaged in business, his Profits for the 
year are the excess of his receipts from his busi- 
ness during the year over his outlay for his 
business ; the difference between the value of his stock and 
plant at the end and at the beginning of the year being taken 
as part of his receipts or as part of his outlay, according as 
there has been an increase or decrease of value. What re- 
Earningsof mains of his profits after deducting interest on 
Management, jjjg capital at the current rate may be called his 
Earnings of undertaking or management. 

The income derived from the ownership of land and other 
free gifts of nature is commonly called Bent', 
and the term is sometimes stretched, so as to 
include the income derived from houses and other things the 
supply of which is limited and cannot quickly be increased. 

§ 7. Social Income may be estimated by adding together 
the incomes of the individuals in the society in 
question, whether a nation or any other larger 
or smaller group of persons. But to reckon it directly 
is for most purposes simplest and best. Everything that is 
produced in the course of a year, every service rendered, every 
fresh utility brought about is a part of the national income. 

Thus it includes the benefit derived from the advice of a 
ph3'sician, the pleasure got from hearing a professional singer, 
and the enjoyment of all other services which one person may 
be hired to perform for another. It includes the services 


Social income. 



rendered no't only by the omnibus driver, but also by the 
coachman who drives a private carriage. It includes the 
services of the domestic servant who makes or mends or 
cleans a carpet or a dress, as well as the results of the 
work of the upholsterer, the milliner, and the dyer. 

We must however be careful not to count the same thing 
twice. If we have counted a carpet at its full value, we have 
already counted the values of the yarn and the labour that 
were used in making it; and these must not be counted 
again ^ 

1 Suppose however a landowner with an annual income of £10,000 hires a 
private secretary at a salary of £500, who hires a servant at wages of £50. It 
may seem that if the incomes of all these three persons are counted m as part 
of the net income of the country, some of it will be counted twice over, and 
some three times. But this is not the case. The landlord transfers to his 
secretary, m return for his assistance, part of the purchasuig power derived 
from the produce of land; and the secretary again transfers part of this to his 
servant in return for his assistance. The farm produce the value of which 
goes as rent to the landlord, the assistance which the landlord derives from 
the work of the secretary, and that which the secretary derives from the work 
of the servant are independent parts of the real net mcome of the country; 
and therefore the £10,000 and the £500 and the £50 which are then- money 
measures, must all be counted in when we are estimating the income of the 
country. But if the landlord makes an allowance of £500 a year to his son, 
that must not be comited as an independent income ; because no services are 
rendered for it, and it would not be assessed to the Income-tax. 





Is Book III. we are to make a short provisional study of 
wants and their satisfaction; or, to express nearly the same 
thing in other words, of demand and consumption. 

This subject has been somewhat neglected by economists 
Scope of till recently; partly because science seemed to 

have little to say upon it, beyond what is the 
common property of all sensible people who have had a 
large experience of life. But in recent years economics has 
borrowed much from the exact habits of thought and expres- 
sion of the older physical sciences; and, when these were 
applied to state clearly how the demand for a thing is to be 
measured, they were found to open up at once new aspects 
of the main problems of economics. The theory of demand is 
yet in its infancy ; but we can already see that it may be 
possible to collect and arrange statistics of consumption in 
such a way as to throw light on difficult questions of great 
importance to public well-beino-. 

And while the progress of the science is giving us a new 
power, the spirit of the age is giving us a new motive for this 
inquiry. It is urging us to pay ever closer attention to the 



question whether our increasing wealth may not be made to 
go further than it does in promoting the general well-being ; 
and this again compels us to examine how far the exchange 
value of any element of wealth, whether in collective or indi- 
vidual use, represents accurately the addition which it makes 
to happiness and well-being. 

We will begin this Book with a short study of the 
variety of human wants, considered in their relation to 
human efforts and activities. For the progressive nature of 
man is one whole. There is a special need to insist on this 
just now, because the reaction against the comparative neglect 
of the study of wants by the earlier economists shows signs 
of being carried to the opposite extreme. It is important still 
to assert the great truth on which they dwelt somewhat too 
exclusively ; viz. that while wants are the rulers of life among 
the lower animals, it is to changes in the forms of efforts and 
activities that we must turn wlien in search for the keynotes 
of the history of mankind. 




>A^ants are 



§ 1. Human wants and desires are countless in number 
and very various in kind. The uncivilized man indeed has 
not many more needs than the brute animal j but 
every step in his progress upwards increases the 
variety of them together with the variety in his 
method of satisfying them. Thus though the brute and the 
savage alike have their preferences for choice morsels, neither 
of them cares much for change for its own sake. As, however, 
man rises in civilization, as his mind becomes developed, and 
even hi^ animal passions begin to associate themselves with 
mental activities, his wants become rapidly more subtle and 
more various; and in the minor details of life he begins to 
desire change for the sake of change, long before he has con- 
sciously escaped from the yoke of custom. The first great 
step in this direction comes with the art of making a fire : 
gradually he gets to accustom himself to many different kinds 
of food and drink cooked in many different ways : and before 
long, monotony begins to become irksome to him ; and he finds 
it a great hardship when accident compels him to live for 
a long time exclusively on one or two kinds of food. 

As a man's riches increase his food and drink become 
more various and costly; but his appetite is 
limited by nature, and when his expenditure on 
food is extravagant it is more often to gratify the 
desires of hospitality and display than to indulge his own 

Desire for 



I » 

But, as Senior says : — " Strong as is the desire for variety, 
it is weak compared with the desire for distinc- fQ^^jjgti„(.tij,n. 
tion: a feeling which if we consider its univer- 
sality and its constancy, that it affects all men and at all 
times, that it comes with us from the cradle and never leaves 
us till we go into the grave, may be pronounced to be the most 
powerful of human passions." This great half-truth is well 
illustrated by a comparison of the desire for choice and various 
food with that for choice and various dress. 

§ 2. That need for dress which is the result of natural 
causes varies with the climate and the season of 
year, and a little with the nature of a person's ^^^^^J"*" "'^^^ 
occupations. But in dress conventional wants 
overshadow those which are natural. For instance in England 
now a well-to-do labourer is expected to appear on Sunday in 
a black coat and, in some places, in a silk hat ; though these 
would have subjected him to ridicule but a short time ago; 
and in all the lower ranks of life there is a constant increase 
both in that variety and expensiveness which custom requires 
as a minimum, and in that which it tolerates as a maximum ; 
and the efforts to obtain distinction by dress are extending 
themselves throughout the lower grades of English Society. 

But in the upper grades, though the dress of women is 
still various and costly, that of men is simple and inexpensive 
as compared with what it was in Europe not long ago, and is 
to-day in the East. For those men who are most truly dis- 
tinguished on their own account, have a natural dislike to 
seem to claim attention by their dress; and they have set 
the fashion \ 

1 A woman may display wealth, but she may not display only her wealth, 
by her dress; or else she defeats her ends. She must also suggest some dis- 
tinction of character as well as of wealth : for though her dress may owe more 
to her dressmaker than to herself, yet there is a traditional assumption that, 
being less busy than man with external affairs, she can give more time to 
taking thought as to her dress. Even under the sway of modem fashions, to 
be "well dressed" — not "expensively dressed" — is a, reasonable minor aim 



§ 3. House-room satisfies tlie imperative need for shelter 
from the weather : but that need plays very little 

House-room. . . r j j 

part in the effective demand for house-room. For 
though a small but well-built cabin gives excellent shelter, its 
stifling atmosphere, its necessary uncleanliness, and its want of 
the decencies and the quiet of life are great evils. It is not so 
nmch that they cause physical discomfort as that they tend to 
stunt the faculties, and limit people's higher activities. With 
eveiy increase in these activities the demand for larger house- 
room becomes more urgent'. 

And therefore relatively large and well appointed house- 
room is, even in the lowest social ranks, at once a " necessary 
for efficiency*," and the most convenient and obvious way of 
advancing a material claim to social distinction. And even 
in those grades in which everyone has house-room sufficient for 
the higher activities of himself and his family, a yet further 
and almost unlimited increase is desired as a requisite for the 
exercise of many of the higher social activities. 

§ 4. It is again the desire for the exercise and develop- 

ment of activities, spreading through every rank 
develop activi- of Society, which leads not only to the pursuit of 

science, literature and art for their own sake, but 
to the rapidly increasing demand for the work of those who 
pursue them as professions. This is one of the most marked 
characteristics of our age j and the same may be said of the 
growing desire for those amusements, such as athletic games 

for those who desire to be distiuguished for their faculties and abilities ; and 
this will be still more the ease if the evil dominion of the wanton vagaries of 
fashion should pass away. For to arrange costumes beautiful in themselves, 
various and well-adapted to their purposes is an object worthy of high en- 
deavour ; it belongs to the same class, though not to the same rank in that 
class, as the painting of a good picture. 

1 It is true that many active muided working men prefer cramped lodghigs 
in a town to a roomy cottage in the country ; but that is because they have a 
strong taste for those activities for which a country life offers little scope. 

•^ See above Book II. ch. in. § 3. 



' *> 

and travelling, which develop activities, rather than indulge 
any sensuous craving ^ 

For indeed the desire for excellence for its own sake, is 
almost as wide in its range as the lower desire Desire for 
for distinction. As that graduates down from excellence, 
the ambition of those who may hope that their names will 
be in men's mouths in distant lands and in distant times, to 
the hope of the country lass that the new ribbon she puts on 
for Easter may not pass unnoticed by her neighbours; so the 
desire for excellence for its own sake graduates down from 
that of a Newton, or a Stradivarius, to that of the fisherman 
who, even when no one is looking and he is not in a hurry, 
delights in handling his craft well, and in the fact that she 
is well built and responds promptly to his guidance. Desires 
of this kind exert a great influence on the Supply of the 
highest faculties and the greatest inventions; and they are 
not unimportant on the side of Demand. For a large part of 
the demand for the most highly skilled professional services 
and the best work of the mechanical artisan, arises from the 
delight that people have in the training of their own faculties, 
and in exercising them by aid of the most delicately ad- 
justed and responsive implements. 

Speaking broadly therefore, although it is man's wants 
in the earliest stages of his development that 

. 1 . , . . . . /, , Relation of 

give rise to his activities, yet afterwards each Wants to 

new step upwards is to be regarded rather as Activities, 
the development of new activities giving rise to Qew wants, 
than that of new wants giving rise to new activities. 

We see this clearly if we look away from healthy con- 
ditions of life, where new activities are constantly being 
developed, and watch the West Indian negro using his new 

1 As a minor pomt it may be noticed that those drinks which stunulate the 
mental activities are largely displacing those which merely gratify the senses. 
The consumption of tea is increasing very fast while that of alcohol is station- 
ary ; and there is in all ranks of society a diminishing demand for the grosser 
and more unmediately stupefying forms of alcohol. 


BOOK III. CH. II. § 4. 

freedom and wealth not to get the means of satisfying new 
wants, but in idle stagnation that is not rest ; or again look 
at that rapidly lessening part of the English working classes, 
who have no ambition and no pride or delight in the growth 
of their faculties and activities, and spend on drink whatever 
surplus their wages afford over the bare necessaries of a 
squalid life. 






§ 1. The terms Utility and Want are closely related. 
The utility of a thing to a person is measured The term 
by the extent to which it satisfies his wants at utility, 
the time. And wants are here reckoned simply with regard 
to their volume and intensity. If judged by an ethical or 
prudential standard, solid food may be more useful than 
whiskey of equal price, and warm underclothing than a new 
evening dress. But if a person prefers the whiskey or the 
evening dress, then it satisfies the greater want, it has 
the greater "utility," for him or her. No doubt this use 
of the term Utility might mislead those not accustomed to it ; 
but that seldom occurs in practice. 

We have just seen that each several want is limited, and 
that with every increase in the amount of a The law of 
thing which a man has, the eagerness of his satiable 

"wsints of 

desire to obtain more diminishes ; until it yields diminishing 
place to the desire for some other thing, of "*'^»*y- 
which perhaps he hardly thought so long as his more urgent 
wants were still unsatisfied. Everyone says now and then to 
himself — I have had so much of this that I do not care to 
buy any more. If it were cheaper I might buy a little more ; 
but I do not care enough for it to buy more at a price as high 
as is charged for it. In other words, the additional benefit 
which a person derives from a given increase of his stock of 
anything, diminishes with the growth of the stock that he 
already has. This statement of a fundamental tendency of 




1, 2. 

Total utility. 

human nature may be called the law of satiable wants or of 
diminishing utility. 

Suppose, for instance, that tea of a certain quality is to be 
had at 2s. per lb. A person might be willing to give 10s. 
for a single pound once a year rather than go without it 
altogether; while if he could have any amount of it for 
nothing he would perhaps not care to use more than 
30 lbs. in the year. But as it is, he buys perhaps 10 lbs. 
in the year; that is to say, the difference between the 
satisfaction which he gets from buying 9 lbs. and 10 lbs. is 
enough for him to be willing to pay 2s. for it : while the fact 
that he does not buy an eleventh pound, shows that he does 
not think that it would be worth an extra 2s. to him. 

Such facts as these come within the daily experience of 
everybody. They illustrate the rule that the total utility of 
a thing to any one (that is, the total satisfaction 
or benefit it yields him) generally increases with 
every increase in his stock of it; but yet does not increase 
as fast as his stock increases. If a number of equal additions 
be made to his stock, one after another, the additional benefit 
which he derives from any one will be less than from the 
previous one. In other words, if his stock of it increases at 
a uniform rate, the benefit which he derives from it increases 
at a diminishing rate. 

To return to our purchaser of tea. The market price of 
2s. a pound measures the utility to him of the tea which 
lies at the margin, or terminus or end of his purchases ; and 
this introduces us to one of those few technical terms which 
are indispensable ; because the notions which they express are 
ever recurring in the business of life ; while yet there are no 
words in ordinary use which represent them well. 

We may call that part of the commodity which a person 
Marginal ^^ Only just induced to purchase his marginal 

purchase. purchase ; because he is on the margin of doubt 
whether it is worth his while to incur the outlay required 



to obtain it. And the utility of his marginal purchase may 
be called the tnarginal utility of the commodity Marginal 
to him. Or, if instead of buying it, he makes "tJiity- 
the thing himself, then its marginal utility is the utility of 
that part which he thinks it only just worth his while to 
make. If the price which a purchaser of tea is just willing to 
pay for any pound be called his demand price^ Marginal 
then 2s. is his marginal demand />rice. And de*"and price, 
our law may be worded : — 

The larger the amount of a thing that a person has, the 
less will, other things being equal, be the price which he will 
pay for a little more of it : or, in other words, the less will be 
his marginal demand for it. The condition "other things 
being equal " must not be allowed to drop out of sight. If, 
for instance, his income were suddenly increased, he would be 
likely to buy more of a thing, even though he had a good 
stock of it already. 

§ 2. Next we have to take account of the fact that, 
as people say, " a shilling is worth much more to „^ 

'' . ° . , The marginal 

a poor man than to a rich one." We have utility of 
already^ noticed, for instance, that a clerk with "^°"eyva"«s. 
£100 a-year will walk to his business in a much heavier rain 
than the clerk with £300 a-year; for a threepenny omnibus 
fare measures a greater benefit, or utility to the poorer man 
than to the richer. If the poorer man spends the money, 
he will suffer more from the want of it afterwards than 
the richer would. The benefit that is measured in the poorer 
man's mind by threepence, is greater than that measured by 
it in the richer man's mind. If the richer man rides a 
hundred times in tlie year and the poorer man twenty times, 
then the benefit of the hundredth ride which the richer man 
is only just induced to take is measured to him by threepence ; 
and the benefit of the twentieth ride which the poorer man 

1 Book I. Ch. III. § 1. 




2, 3. 




is only just induced to take is measured to him by threepence. 
For each of them the marginal benefit or utility is measured 
by threepence ; but it is greater in the case of the poorer man 
than in that of the richer. 

So when tea, sold at '2s. a pound, is drunk by different 
people some of whom are richer than others, then 2*'. a pound 
will measure the utility, or benefit, to each one of them of the 
tea that lies at the margin or terminus or end of his or her 
purchases. But while one will drink twenty pounds a year, 
another will make shift with six ; and the benefit of the 
marginal purchase will be much greater to the latter than to 
the former. If the price of this kind of tea fell to Is. 8c?., a 
poor person who was enabled to buy an extra seventh pound 
of it, would derive more benefit from the change than a richer 
one would from adding another pound, or perhaps even another 
two or three pounds to his or her already large consumption. 
Thus we may say generally that every increase in a person's 
resources increases the price which he is willing to pay for 
any given benefit. And in the same way every diminution of 
his resources diminishes the price that he is willing to pay for 
any benefit. 

To obtain complete knowledge of a person's demand for 
anything, we should have to ascertain how much 

A person s j m ^ ^ £> 

Demand for of it he would be willing to purchase at each of 

anything. ^^^ ^^^^^^ ^^ ^j^j^j^ -^ j^ j^j^^j^ ^^ ^ offered. 

Thus for instance we may find that he would buy 

6 lbs. at 50(1 per lb. 10 lbs. at 2id. per lb. 

7 „ 40 „ 11 „ 21 

8 „ 33 „ 12 „ 19 

9 „ 28 „ 13 „ 17 
If corresponding prices were filled in for all intermediate 

amounts we should have an exact statement of his demand, 
and the complete list may be called his demand schedule^. 

1 "We may here introduce the first of a series of simple dia^ams desipfiied to 
illustrate economic theory. Thone tvho wish may omit the whole sencs; for the 





§ 3. When we say that a person's demand for anything 
increases, we mean that he will buy moixi of it than he 
would before at the same price, and that he will buy as much 
of it as before at a higher price. 

Tliat is to say, a general increase in his demand is an 
increase throughout the whole list of prices at , 

, . , , . .„. ^ Increase in a 

which he is willing to purchase different amounts person's 
of it ; and not merely that he is willing to buy *^^™^"'^- 
more of it at the current priced 

reasoning in the text is always complete in itself and does not depend on 
them. They do but express familiar facts in a new language which is terse and 
precise, and will be found helpful by those readers who are inclined towards it. 
Such a demand schedule may be translated, on a plan now coming into 
familiar use, into a curve that may be called his demand curve. Let Ox and 
Oil be drawn the one horizontally, the other vertically. Let an inch measured 
along Ox represent 10 lb. of tea, and au inch measui-ed along Oy represent 


Tenths of 
an inch. 

Fortieths of 
au inch. 

Take Om , = 6, and draw m ip, = 50 

0/«2 = 7 
Oma = 8 

0/rt5 = l-0 

Ome = 11 
Onij = 12. 
0^8 = 13 

V1.2P2 = 40 

w?42^4 = 28 

mj2)j = ld 
})'aPa = n 




p, F'e. (1). 







•o to c~ 

S S S: 


bemg on Ox and viijh being di-awn vertically from m,; and so for the 

others. Then jhJh Pa are points on his Demand Curve for tea ; or as wo 

may say Demand Points. If we could find demand points in the same manner 
for every possible quantity of tea we should get the whole continuous curve 
1)1/ as shown in the figure. 

1 Geometrically it is represented by raisuig his demand curve, or, what 
comes to the same thing, moving it to the right, with perhaps some modifica- 
tion of its shape; or hi other words by raising his demand schedule. 

For some discussion of the uses of the term Demand by Mill and Cairnes, 
see Principles III. iii. 4. 


So far we have looked at the demand of a single 
Demand of a individual. And in the particular case of such a 
market. thing as tea, the demand of a single person is 

fairly representative of the general demand of a whole market : 
for the demand for tea is a constant one ; and, since it can be 
purchased in small quantities, every variation in its price is 
likely to affect the amount which he will buy. But even 
among those things which are in constant use, there are 
many for which the demand on the part of any single in- 
dividual cannot vary continuously with every small change in 
price, but can move only by great leaps. For instance, a 
small fall in the price of hats or watches will not affect the 
action of everyone, but it will induce a few persons, who were 
in doubt whether or not to get a new hat or a new watch, to 
decide in favour of doing so. 

In large markets, however, where rich and poor, old and 
young, men and women, persons of all varieties of tastes, 
temperaments and occupations are mingled together, every 
fall, however slight, in the price of a commodity in general 
use, will, other things being equal, increase the total sales of 
it ; just as an unhealthy autumn increases the mortality of a 
large town, though many persons are uninjured by it. 

Let us however return to the demand for tea. The 
aggregate demand in the place is the sum of the demands 
of all the individuals there. Some will be richer and some 
poorer than the individual consumer whose demand schedule 
we have just written down ; some will have a greater and 
others a smaller liking for tea than he has. Let us suppose 
that there are in the place a million purchasers of tea, and 
that their average consumption is equal to his at each several 
price. Then the demand of that place is represented by the 
same schedule as before, if we write a million pounds of tea 
instead of one pound'. 

1 Tlie dcmaiul is represented by the same curve as before, only an inch 




There is then one general Law of Demand :— The greater 
the amount to be sold, the smaller must be the Law of De- 
price at which it is offered in order that it may mand. 
find purchasers ; or, in other words, the amount demanded in- 
creases with a fall in price, and diminishes with a rise in price. 

There will not be any uniform relation between the fall in 
price and the increase of demand. A fall of one-tenth in the 
price may increase the sales by a twentieth or by a quarter, 
or it may double them. But as the numbers in the left- 
hand column of the demand schedule increase, those in the 
right-hand column will always diminish. 

The price will measure the marginal utility of the com- 
modity to each purchaser individually: we cannot speak of 
price as measuring marginal utility in gpAieral, because the 
wants and circumstances of different people are different. 

§ 5. The demand prices in our list are those at which 
various quantities of a thing can be sold in a 
market during a given time and under given a rival 
conditions. If the conditions vary in any respect <=°"^™o<J*ty- 
the prices will probably require to be changed; and this 
has constantly to be done when the desire for anything is 
materially altered by a variation of custom, or by a cheapening 

measured along Ox now represents ten million pounds instead of ten pounds. 
And a formal definition of the Demand curve „ 
for a market may be given thus :— The demand 
curve for any commodity in a market during 
any given unit of time is the locus of demand 
points for it. That is to say, it is a curve such 
that if from any point P on it, a straight line 
PM be drawn perpendicular to Ox, PM repre- 
sents the price at which purchasers will be 
forthcoming for an amount of the commodity 
represented by OM. 

It must be remembered that the demand 
schedule gives the prices at which various quantities of a thing can be sold 
in a market during a given time and under given conditions. If the conditions 
vary in any respect the figures of tlie schedule will probably require to be 


Fig. (2). 

( ' 

.r I 


i i 



BOOK III. CH. TIT. § 5. 

of the supply of a rival commodity, or by the invention of 
a new one. For instance, the list of demand prices for tea 
is drawn out on the assumption that the price of coffee is 
known; but a failure of the coffee harvest would raise the 
prices for tea. The demand for gas is liable to be reduced by 
an improvement in electric lighting ; and in the same way a 
fall in the price of a particular kind of tea may cause it to be 
substituted for an inferior but cheaper variety. 

Our next step will be to consider the general character of 
demand in the cases of some important commodities ready 
for immediate consumption. We shall thus be continuing 
the inquiry made in the preceding chapter as to the variety 
and satiability of wants; but we shall be treating it from 
a rather different point of view, viz. that of price-statistics. 




§ 1. We have seen that the only universal law as to a 
person's desire for a commodity is that it dimi- 
nishes, other things beinsf equal, with everv in- Elasticity of 

• 1 • 1 /. 1 ,. demand 

crease in his supply of that commodity. But this 

diminution may be slow or rapid. If it is slow the price that 
he will give for the commodity will not fall much in conse- 
quence of a considerable increase in his supply of it; and a 
small fall in price will cause a comparatively large increase in 
his purchases. But if it is rapid, a small fall in price will 
cause only a very small increase in his purchases. In the 
former case his willingness to purchase the thing stretches 
itself out a great deal under the action of a small inducement: 
the elasticity of his wants, we may say, is great. In the 
latter case the extra inducement given by the fall in price 
causes hardly any extension of his desire to purchase : the 
elasticity of his demand is small. If a fall in price from say 
IQd. to 15o?. per lb. of tea would much increase his purchases, 
then a rise from 15rZ. to l&d. would much diminish them: 
when the demand is elastic for a fall in price, it is elastic also 
for the opposite rise. 

As with the demand of one person so with that of a 
whole market. And we may say generally :— The elasticity 
of demand in a market is great or small according as the 
amount demanded increases much or little for a given fall 
in price, and diminishes much or little for a given rise in 

§ 2. The price which is so high relatively to the poor man 
as to be almost prohibitive, may be scarcely felt 
by the rich; the poor man for instance never differed 
tastes wine, but the very rich man may drink as ^°*^°°*«s. 

1 1 


BOOK in. CH. IV. 

2, 3. 

much of it as he has a fancy for, without giving himself a 
thought of its cost. We shall therefore get the clearest notion 
of the law of the elasticity of demand, by considering one class 
of society at a time. Of course there are many degrees of 
richness among the rich, and of poverty among the poor ; but 
for the present we may neglect these minor subdivisions. 

When the price of a thing is very high relatively to any 
class, they will buy but little of it ; and in some cases custom 
and habit may prevent them from using it freely even after its 
price has fallen a good deal. But such cases, though not 
infrequent, will not form the general rule, and anyhow as 
soon as it has been taken into common use, any considerable 
fall in its price will cause a great increase in the demand for 
it. The elasticity of demand will be great for high prices, and 
great or at least considerable for medium prices, but it will 
decline as the price falls ; and gradually fade away if the fall 
goes so far that satiety level is reached. 

The level at which -'very high" prices end and *'high" 
prices begin, is of course different for different classes, and so 
is the level at which " low " prices end and " very low " prices 
begin. Varieties in detail arise from the fact that there are 
some commodities with which people are easily satiated, and 
others — chiefly things used for display — for which their desire 
is almost unlimited \ 

§ 3. There are some things the current prices of which 
in this country are " very low " relatively even to 
the poorer classes ; such are for instance salt, and 
many kinds of savours and flavours, and also cheap medicines. 

1 The figures in Ch. in. § 4 show a small elasticity in the demand for tea, 
and a diminution iix the total outlay on it as its price falls. To illustrate the 
general rule that the total outlay is largest for prices neither very high, nor 
very low, we might supixjse 2 pounds to be bought at 50 pence, 4 at 40, 8 at 30, 
14 at 24, 17 at 20, 20 at 17, 24 at 14, 27 at 12, 30 at 9, 40 at 5, 50 at 3 ; so that 
the total outlay would be 200 pence for a very high price, rising to 340 pence 
for medium prices and falling again to 150 for a very low price. But see 
Frinci^les, HI. iv. 2. 




It is doubtful whether any fall in price would induce a consi- 
derable increase in the consumption of these. 

The current prices of meat, milk and butter, wool, tobacco, 
imported fruits, and of ordinary medical attendance, are such 
that every variation in price makes a great change in the 
consumption of them by the working classes, and the lower 
half of the middle classes ; but the rich would not much in- 
crease their own personal consumption of them however cheaply 
they were to be had. In other words the direct demand for 
these commodities is very elastic on the part of the working 
and lower middle classes, though not on the part of the rich. 
But the working class is so numerous that their consumption 
of such things as are well within their reach is much greater 
than that of the rich ; and therefore the aggregate demand for 
all things of the kind is very elastic. A little while ago sugar 
l)elonged to this group of commodities : but its price in Eng- 
land has now fallen so far as to be low relatively even to the 
working classes, and the demand for it is therefore not 


The current prices of wall-fruit, of the better kinds of fish 
and other moderately expensive luxuries are such as to make 
the consumption of them by the middle class increase much 
with every fall in price ; in other words the middle class de- 
mand for them is very elastic : while the demands on the 
part of the rich and on the part of the working class is much 
less elastic, the former because it is already nearly satiated, 
the latter because the price is still too high. 

The current prices of such things as rare wines, fruit out 
of season, highly skilled medical and legal assistance, are so 
high that there is but little demand for them except from 
the rich : but what demand there is has in most cases con- 
siderable elasticity. And in fact much of the demand for 
the more expensive kinds of food is really a demand for the 
means of obtaining social distinction, and is almost in- 


( 1 

J ; 



4, 5. 

§ 4. The case of necessaries is exceptional. "When the 
Demand for price of wheat is very higli, and again when it 
necessaries. jg ^^^^ j^^^ ^j^^ demand has very little elasticity : 
at all events if we assume that wheat, even when scarce, is the 
cheapest food for man ; and that, even when most plentiful, 
it is not consumed in any other way. We know that a fall in 
the price of the quartern loaf from 6d. to 4d has scarcely any 
effect in increasing the consumption of bread. With regard 
to the other end of the scale it is more difficult to speak with 
certainty, because there has been no approach to a scarcity in 
England since the repeal of the corn laws. But, availing our- 
selves of estimates made in a less happy time, we may sup- 
pose that deficits in the supply of 1, 2, 3, 4, or 5 tenths Avould 
cause a rise in price of 3, 8, 16, 28, or 45 tenths respectively. 
Much greater variations in prices indeed than this have not 
been uncommon. Thus wheat sold in London for ten shillings 
a bushel in 1335, but in the following year it sold for ten 

There may be even more violent changes than this in the 
price of a thing which is not necessary, if it is penshable and 
the demand for it is inelastic : thus fish may be veiy dear one 
day, and sold for manure two or three days later. 

Water is one of the few things the consumption of which 
we are able to observe at all prices from the very highest 
down to nothing at all. At moderate prices the demand for 
it is very elastic. But the uses to which it can be put are 
capable of being completely filled : and as its price sinks to- 
wards zero the demand for it loses its elasticity. Nearly the 
same may be said of salt. Its price in England is so low that 
the demand for it as an article of food is very inelastic : but 
in India the price is comparatively high and the demand is 
comparatively elastic. 

The price of house-room on the other hand has never 
fallen very low except when a locality is being deserted by 
its inhabitants. Where the condition of society is healthy. 




and there is no check to general prosperity, there seems 
always to be an elastic demand for house-room, on account 
both of the real conveniences and the social distinction which 
it affords. The desire for those kinds of clothing which are 
not used for the purpose of display, is satiable: when their 
price is low the demand for them has scarcely any elasticity. 

§ 5. When trying to ascertain how the purchases of a 
commodity are affected by changes in its price, we causes that 
meet with several difficulties. We must take obscure the in - 
account of changes in the purchasing power of on demand, 
money which are a source of confusion in all statistics of 
prices. And we must allow for changes in fashion, and ta^ste 
and habit, for the opening out of new uses of a commodity, 
for the discovery or improvement or cheapening of other things 
that can be applied to the same uses with it. 

And further we must remember that time is required to 
enable a rise in the price of a commodity to exert its full 
influence on consumption. Time is required for 
consumers to become familiar with substitutes the growth of 
that can be used instead of it, and perhaps for "^"^ ''^'''^^• 
producers to get into the habit of producing them in sufficient 
quantities. Time may be also wanted for the growth of habits 
of familiarity with the new commodities and the discovery of 
methods of economizing them. 

For instance when wood and charcoal became dear in 
England, familiarity with coal as a fuel grew slowly, fireplaces 
were but slowly adapted to its use, and an organized traffic in 
it did not spring up quickly even to places to which it could 
be easily carried by water: the invention of processes by 
which it could be used as a substitute for charcoal in manu- 
facture went even more slowly, and is indeed hardly yet com- 
plete. Again, when in recent years the price of coal became 
very high, a great stimulus was given to the invention of 
economies in its use especially in the production of iron and 
steam ; but few of these inventions bore much practical fruit 



74 BOOK III. CH. IV. § 5. 

till after the high price had passed away. Again, when a 
new line of tramways or of suburban railways is opened, even 
those who live near the line do not get into the habit of 
making the most of its assistance at once ; and a good deal 
more time elapses before many of those whose places of 
business are near one end of the line change their homes so 
as to live near the other end. Again, when petroleum first 
became plentiful few people were ready to use it freely ; 
gradually petroleum and petroleum lamps have become familiar 
to all classes of society : too much influence would therefore be 
attributed to the fall in price which has occurred since then, 
if it were credited with all the increase of consumption'. 

1 The demand for things of a higher quality depends much on sensibility: 
some people care little for a refined flavour in their wine provided they can 
get plenty of it: others crave a high quality, but are easily satiated. In the 
ordinary working class districts the inferior and the better joints are sold at 
nearly the same price: but some well paid artisans in the north of England 
have developed a likhig for the best meat, and will pay for it nearly as high a 
price as can be got in the west end of London, where the price is kept arti- 
ficially high by the necessity of sending the inferior joints away for sale e se- 
where Use also gives rise to acquired distastes as well as to acquired tastes. 

Generally speaking those things have the most elastic demand, which are 
capable of being appUed to many different uses. Water for instance is needed 
first as food, then for cooking, then for washing of various kinds and so on. 
When there is no special drought, but water is sold by the pailful, the price 
may be low enough to enable even the poorer classes to (brink as much of it as 
they are inclined, while for cooking they sometimes use the same water twice 
over, and they apply it very scantily in washing. The middle classes will 
perhaps not use any of it twice for cooking; but they wdl make a pail of 
water go a good deal further for washing purposes than if they had an un- 
limited supplv at command. When water is supplied by pipes, and charged 
at a very low"'rate by meter, many people use as much of it even for was lung 
as they feel at all inclined to do; and when the water is supplied not by 
meter but at a fixed annual charge; and is laid on in every p ace where it is 
wanted, the use of it for every puri)ose is carried to the full satiety limit. 

1 n 




§ 1. The primitive housewife finding that she has a 
limited number of hanks of yarn from the year's 
shearing, considers all the domestic wants for m*e^ans*be °" ° 
clothing and tries to distribute the yarn between tween different 


them in such a way as to contribute as much as 
possible to the family well-being. She will think she has 
failed if, when it is done, she has reason to regret that she 
did not apply more to making, say socks, and less to vests. 
That would mean that she had miscalculated the points at 
which to suspend the making of socks and vests respectively ; 
that she had gone too far in the case of vests, and not far 
enough in that of socks ; and that therefore at the points at 
which she actually did stop, the utility of yarn turned into 
socks was greater than that of yarn turned into vests. But 
if, on the other hand, she hit on the right points to stop at, 
then she made just so many socks and vests that she got an 
equal amount of good out of the last bundle of yarn that she 
applied to socks, and the last she applied to vests. This illus- 
trates a general principle, which may be expressed thus : — 

If a person has a thing which he can put to several uses, 
he will distribute it between these uses in such a way that it 
has the same marginal utility in all. For if it had a greater 
marginal utility in one use than another, he would gain by 
taking away some of it from the second use and applying it to 
the first. 


BOOK III. CH. V. §§ 2, 3. 

One great disadvantage of a primitive economy, in which 
there is but little free exchange, is that a pei-son may easily 
have so much of one thing, say wool, that, when he has 
applied it to every possible use, its marginal utility in each 
use is low : and at the same time he may have so little of 
some other thing, say wood, that its marginal utility for him 
is very high. Meanwhile some of his neighbours may be in 
great need of wool, and have more wood than they can turn 
Difficulties of ^^ 8^^ account. If each gives up that which 
barter. has for him the lower utility and receives that 

which has the higher, each will gain by the exchange. But 
to make such an adjustment by barter, would be tedious and 

The difficulty of barter is indeed not so very great where 
there are but a few simple commodities, each of which can be 
adapted by domestic work to several uses ; the weaving wife 
and the spinster daughters adjusting lightly the marginal 
utilities of the different uses of the wool, while the husband 
and the sons do the same for the wood. 

§ 2. But when commodities have become very numerous 
The need for ^^^ highly specialized, there is an urgent need 
money. for the free use of money, or general purchasing 

power; for that alone can be applied easily in an unlimited 
variety of purchases. And in a money-economy, good ma- 
nagement is shown by so adjusting the margins of suspense 
on each line of expenditure that the marginal utility of a 
shilling's worth of goods on each line shall be the same. 

Thus for instance the clerk who is in doubt whether to 
ride to town, or to walk and have some little extra indulgence 
at his lunch, is weighing against one another the (marginal) 
utilities of two different modes of spending his money. And 
. ^ when an experienced housekeeper urges on a 
domestic young couple the importance of keeping accounts 

accounts. carefully, a chief motive of the advice is that 

they may avoid spending impulsively a great deal of money on 





furniture and other things ; for, though some quantity of these 
is really needful, yet, when bought lavishly, they do not give 
high (marginal) utilities in proportion to their cost. And 
when the young pair look over their year's budget at the end 
of the year, and find perhaps that it is necessary to curtail their 
expenditure somewhere, they compare the (marginal) utilities 
of different items, weighing the loss of utility that would 
result from taking away a pound's expenditure here, with that 
which they would lose by taking it away there : they strive 
to adjust their parings down so that the aggregate loss of 
utility may be as little as possible. 

§ 3. The different uses between which a commodity is 
distributed need not all be present uses ; some may be present 
and some future. A prudent person will endeavour to dis- 
tribute his means between all their several uses 
present and future in such a way that they will future benefits 
have in each the same marginal utility. But, in ^^^^^^^ ^^^' 
estimating the present marginal utility of a dis- 
tant source of benefit to him, a twofold allowance must be 
made; firstly, for its uncertainty'; and secondly, for the dif- 
ference in the value to him of a distant as compared with a 
present benefit^. 

If people regarded future benefits as equally desirable 
with similar and equal benefits at the present 
time, they would probably endeavour to dis- fits are "disi 
tribute their pleasures evenly throughout their 5°ff "rent rat* s 
lives. They would therefore generally be willing by different 
to give up a present pleasure for the sake of an ^^°^ 
equal pleasure in the future, provided they could be certain of 
having it. But in fact human nature is so constituted that 
in estimating the "present value" of a future benefit most 

1 This is an objective property which all well-informed persons would esti- 
mate m the same way, 

2 This is a subjective property which different people would estimate in 
different ways according to their individual characters, and their circumstances 
at the time. 



BOOK III. CH. V. § 3. 

people generally make a second deduction from its future 
value, in the form of what we may call a "discount," that 
increases with the period for which the pleasure is deferred. 
One will reckon a distant benefit at nearly the same value 
which it would have for him if it were present ; while another 
who lias less power of realizing the future, less patience and 
self-control, will care comparatively little for any benefit that 
is not near at hand. 

Many people derive from the mere feeling of ownership a 
stronger satisfaction than they derive from ordinary pleasures 
in the narrower sense of the term : for example, the delight in 
the possession of land will often induce people to pay for it so 
high a price that it yields them but a very poor return on 
their investment. There is a delight in ownership for its own 
sake; and there is a delight in ownership on account of the 
distinction it yields. Sometimes the latter is stronger than 
the former, sometimes weaker; and perhaps no one knows 
himself or other people well enough to be able to draw the 
line quite certainly between the two^ 

1 The rates at which diflferent people discount the future affect not only 
their tendency to save, as the term is ordinarily understood, but also their 
tendency to buy things which will be a lasting source of pleasure rather tlian 
those which give a stronger but more transient enjoyment ; to buy a new coat 
rather than to indulge in a diinking bout, or to choose simple furniture that 
will wear well, rather than sho^vy furniture that will soon fall to pieces. And 
further, the same person will discount future pleasures at diflferent rates at 
diflferent times, according to his mood. 




§ 1. We may now turn to consider how far the price, 
which is actually paid for a thing, represents the 
satisfaction that arises from its possession. This u"nity"^ 
is a subject on which economic science has very 
little to say, but that little is of some importance. 

We have already seen that the price which a person pays 
for a thing, can never exceed, and seldom comes up to that 
which he would be willing to pay rather than go without 
it : so that the gratification which he gets from its purchase 
generally exceeds that which he gives up in paying away its 
price; and he thus derives from the purchase a surplus of 
satisfaction. The excess of the price which he would be 
willing to pay rather than go without the thing, 
over that which he actually does pay, is the suroiuT.*^^ 
economic measure of this surplus satisfaction. 
It has some analogies to a rent, but is perhaps best called 
Consumer's Surplus. 

It is obvious that the Consumer's Surpluses derived from 
some commodities are much greater than from others. There 
are many comforts and luxuries of which the prices are very 
much below those which many people would pay rather than 
go entirely without them ; and which therefore afibrd a very 
great Consumer's Surplus. Good instances are matches, salt, 
a penny newspaper, or a postage-stamp. 

We are apt to underrate the benefits which we derive from 
the opportunities afibrded to us by our surroundings, or, as 

/ < 


BOOK TTI. CH. VT. §§ 1, 2, 3. 



the Germans say, from the Conjuncture of circumstances 
around us. We take it for granted that we can buy a 
newspaper with several thousand lines of news in it for a 
penny : and we seldom consider that if we would pay (say) 
a shilling rather than be deprived of our newspaper, the 
opportunity of buying it for a penny gives us a surplus benefit 
of eleven pence a day. 

This notion is of great importance for the higher work of 
the economic student. But it involves many difficulties, and 
is apt to be misunderstood and misapplied by the beginner : 
and therefore, what little is said of it in the present treatise, 
may be relegated to Appendix B. 

§ 2. The notion itself in some vague form or other is con- 
stantly present with us. TJiis is another instance in which 
the daily language of ordinary life, while sufficient for many 
practical purposes, is not quite exact and complete ; so that 
on examination it is found to suggest more than appears at 
first sight. 

Thus, for instance, it is a common saying that the real 

value of things to us is not gauged by the price we pay for 

them : that, though we spend for instance much more on tea 

than on salt, yet salt is of greater real value to us ; and that 

this would be clearly seen, if we were entirelv 
As regards a i • j «.,—,, . . , -^ 

single person, deprived ot it. This argument is but thrown 

into precise form, when it is said that we cannot 

trust the marginal utility of a commodity to indicate its total 

utility: on the ground that though, when a person spends 

sixpence on a quarter of a pound of tea instead of on a stone 

of salt, he does so because he prefers the tea : yet he would 

not prefer the tea if he did not know that he could easily get 

whatever salt he needed for his more urgent requirements. 

Again, if the real value of anything were being discussed 

with reference, not to a single individual, but to people in 

general, it would naturally be assumed that a shilling's worth 

of gratification to one Englishman might be taken as equiva- 


lent with a shilling's worth to another, " to start with," and 
"until cause to the contrary were shown." But 
every one would know that this was a reason- peo*picT''** 
able course only on the supposition that the con- «^^"*^*"^^- 
sumers of tea and tliose of salt belonged to the same classes of 
people ; and included people of every variety of temperament. 
And if, instead of comparing tea and salt, which are both 
used largely by all classes, we had compared either of them 
with champagne or pineapples, this assumption could not 
have been made even for a first rough guess. In earlier 
generations many statesmen, and even some economists, neg- 
lected to make adequate allowance for considerations of this 
class, especially when constructing schemes of taxation ; and 
their words or deeds seemed to imply a want of sympathy 
with the sufierings of the poor; though more often they were 
due simply to want of thought. 

On the whole however it happens that by far the greater 
number of the events with which economics deals, afiect in 
about equal proportions all the difterent classes of society; so 
that if the money measures of the happiness caused by two 
events are equal, there is not in general any very great 
difference between the amounts of the happiness in the two 
cases. And it is on account of this fact that the exact mea- 
surement of the Consumers' Surplus in a market has already 
much theoretical interest, and may become of high practical 
importance '. 

§ 3. There is another need for caution when estimat- 
ing the dependence of well-being upon material 
wealth. Not only does a person's happiness coiie^tlvr °^ 
often depend more on his own physical, mental ^"^*^- 
and moral health than on the external conditions of his well- 
being : but even among these conditions many that are of 
chief importance for his real happiness are apt to be omitted 
from an inventory of his wealth. Some are free gifts of 


1 Compare p. 21. 


BOOK III. CH. VI. § 3. 

nature; and these might indeed be neglected without great 
harm if they were always the same for everybody ; but in fact 
they vary much from place to place. More of them however 
are elements of collective wealth which are often omitted from 
the reckoning of individual wealth ; but which become im- 
portant when we compare different parts of the modern civi- 
lized world, and even more important when we compare our 
own age with earlier times. 

An increase of income nearly always causes pleasure ; 
but the new enjoyments which it provides often lose quickly 
much of their charm. Partly tliis is the result of familiarity ; 
which makes people cease to derive much pleasure from accus- 
tomed comforts and luxuries, though they suffer great pain 
from their loss. Partly it is due to the fact that with in- 
creased riches there often comes either the weariness of age, or 
at least an increase of nervous strain, and perhaps habits of 
living that lower physical vitality and diminish the capacity 
for pleasure. 

In every civilized country there have been some followei-s 

of the Buddhist doctrine that a placid serenity is 
sure and rest, ^^® highest ideal of life ; that it is the part of the 

wise man to root out of his nature as many wants 
and desires as he can; that real riches consist not in the 
abundance of goods but in the paucity of wants. At the other 
extreme are those who maintain that the growth of new 
wants and desires is always beneficial because it stimulates 
people to increased exertions. They seem to have made the 
mistake, as Mr Herbert Spencer says, of supposing that life is 
for working, instead of working for life. 

The truth seems to be that as human nature is consti- 
tuted, man rapidly degenerates unless he has some hard 
work to do, some difficulties to overcome; and that some 
Value of work ^trenuous exertion is necessary for physical and 
for its own moral health. The fulness of life lies in the de- 

velopment and activity of as many and as high 
faculties as possible. There is intense pleasure in the ardent 




pursuit of any aim, whether it be success in business, the 
advancement of art and science, or the improvement of the 
condition of one's fellow-beings. The highest constructive 
work of all kinds must often alternate between periods of over- 
strain and periods of lassitude and stagnation ; but for oixlinary 
people, for those who have no strong ambitions, whether of a 
lower or a higher kind, a moderate income earned by moderate 
and fairly steady work offers the best opportunity for the 
growth of those habits of body, mind and spirit in which alone 
there is true happiness. 

There is some misuse of wealth in all ranks of society. 
And though speaking generally, we may say that every 
increase in the income of the working classes adds to the 
fulness and nobility of human life, because it is used chiefly 
in the satisfaction of real wants; yet even among the artisans 
m England, and perhaps still more in new countries there 
are signs of the growth of that unwholesome desire for wealth 
as a means of display which has been the chief bane of the 
well-to-do classes in every civilized country. Laws ^^ainst 
luxury have been futile; but it would be a gain 
if the moral sentiment of the community could '^^^ ^'g^er 
induce people to avoid all sorts of display of """°^^"^^*- 
individual wealth. There are indeed true and worthy plea- 
sures to be got from wisely ordered magnificence : but they 
are at their best when free from any taint of personal vanity 
on the one side, and envy on the other; as they are when 
they centre round public buildings, public parks, public col- 
lections of the fine arts, and public games and amusements 
bo long as wealth is applied to provide for every family the 
necessaries of life and culture, and an abundance of the 
higher forms of enjoyment for collective use, so long the 
pursuit of wealth is a noble aim; and the pleasures whtgh it 
brings are likely to increase with the growth of those higher 
activities which it is used to promote. 

When the necessaries of life are once provided, everyone 



BOOK 111. CH. VI. S 3. 

should seek to increase the beauty of things in his possession 
rather than their number or their magnificence. An im- 
provement in the artistic character of furniture and clothing 
trains the higher faculties of those who make them, and is a 
source of growing happiness to those who use them. But if 
instead of seeking for a higher standard of beauty, we spend 
our growing resources on increasing the complexity and intri- 
cacy of our domestic goods, we gain thereby no true benefit, 
no lasting happiness. The world would go much better if 
everyone would buy fewer and simpler things, and would 
take trouble in selecting them for their real beauty; being 
careful of course to get good value in return for his outlay, 
but preferring to buy a few things made well by highly paid 
labour rather than many made badly by low paid labour. 
But we are exceeding the proper scope of the present Book; 
the discussion of the influence on general well-being which is 
exerted by the mode in which each individual spends his 
income is one of the more important of those applications of 
economic science to the art of living which will find their 
place at the end of the Treatise. 







§ 1. The agents of production are commonly classed as 
Land, Labour and Capital. 

By " Land " is meant not merely land in the strict sense 
of the word, but the whole of the material and the forces 
which Nature gives freely for man's aid, in land and water, 
in air and light and heat'. "Land" is, in a chapters ii, 
certain sense, a fixed quantity; and we shall "^• 
have to examine the causes which limit its yield of produce 
to the labour and capital applied to it. 

The amount of labour available for any work depends 
partly upon the number of people able and ready to do the 
work, and partly on their willingness to exert 
themselves, and these are very elastic quantities, y^^j^^*"^ ^^» 
We shall see how they are affected by the wages, 
or other reward available for the work : how high wa^es 
enable parents to bring up a large proportion of their children 
to full age, well nourished in mind and body. And we shall 
gradually inquire (for the question can only be opened out 

1 See below, p. 87. 


BOOK TV. CH. I. § 1. 

Chapter VIII. 

in the present Book) how children and adults drift from 
occupations that hold out small attractions to others that 
are not more difficult and hold out greater. 

We shall look at the growth of wealth, which when con- 
sidered as an agent of production, is called 
CapitaP. We shall see how it is affected by 
that " balancing of future benefits against present " ; which 
has already been noticed^ as controlling people's willingness 
to forego immediate pleasure and to provide machinery, 
buildings, ships, railways, and to make labour more efficient 
in the future. 

Then we shall make some study of division of labour and 
industrial organization generally, and inquire 
Chapters — j^^^ ^Yiqj increase the efficiency of labour. 

Thus we shall prepare the way for an inquiry 
into the causes that govern the Supply price of anything. For 
as the price, required to attract purchasers for 
any given amount of a commodity, was called 
the Demand price for that amount ; so the price required to 
call forth the exertion necessary for producing any given 
amount of a commodity, may be called the Supply price for 
« , TTT J that labour. In Book V, we shall add up the 

Books III and _ ' ^ 

IV lead up to Supply prices of all the different things needed 
to make a commodity, and call the sum of them 
the supply price of that commodity. Then we shall sol, 
against this the corresponding demand price for it; and we 
shall see how the relations between the two govern value. 

Supply Price. 

1 See above p. 49. 

2 See p. 77. 





§ 1. The agents of production, other than labour, are 
described as land and capital : those material 
things which owe their usefulness to human 
labour being classed under capital, and those which owe 
nothing to it being classed as land. The distinction is ob- 
viously a loose one : for bricks are but pieces of earth slightly 
worked up; and the soil of old settled countries has for the 
greater part been worked over many times by man, and owes 
to him its present form. There is however a scientific prin- 
ciple underlying the distinction. While man has no power 
of creating matter, he creates utilities by putting things into 
a useful form*; and the utilities made by him can be in- 
creased in supply if there is an increased demand for them : 
they have a supply price. But there are other utilities over 
the supply of which he has no control ; they are given as a 
fixed quantity by nature and have therefore no supply price. 
The term "land" has been extended by economists so as to 
include the permanent sources of these utilities' ; whether they 
are found in land, as the term is commonly used, or in seas 
and rivers, in sunshine and rain, in winds and waterfalls. 

When we have inquired what it is that marks off land 
from those material things which we regard as products 

1 See Book n. Chapter m. 

2 In Ricardo's famous phrase "the original and indestructible powers of 
the soil." 


BOOK IV. CH. II. §§ 1, 2. 

of the land, we shall find that the fundamental attribute of 
land is its extension. The right to use a certain area of the 
earth's surface is a primary condition of anything that man 
can do; it gives him room for his own actions, with the 
enjoyment of the heat and the light, the air and the rain 
which nature assigns to that area; and it determines his 
distance from, and in a great measure his relations to, other 
things and other persons. 

Some parts of the earth's surface contribute to production 
chiefly by the services which they render to the navigator: 
others are chiefly of value to the miner ; others— though this 
selection is made by man rather than by nature— to the 
builder. But when the productiveness of land is spoken of 
our first thoughts turn to its agricultural use. 

g 2. To the agriculturist an area of land is the means of 
supporting a certain amount of vegetable, and perhaps ulti- 
Man's ower ^^^^^^^ ^^ animal life. He can by suflicient labour 
of altering the make almost any land bear large crops. He can 
prepare the sou mechanically and chemically for 
whatever crops he intends to grow next. He 
can adapt his crops to the nature of the soil and to one 
another; selecting such a rotation that each will leave the 
land in such a state, and at such a time of year, that it can be 
worked up easily and without loss of time into a suitable seed 
bed for the coming crop. He can even permanently alter 
the nature of the soil by draining it, or by mixing with it 
other soil that will supplement its deficiencies'. 

1 Mechauically, the soil must be so far yielding that the fine roots of plants 
can push their way freely in it ; and yet it must be firm enough to give them a 
good hold. The action of fresh air and water and of frosts are nature's tillage 
of the soil ; but man gives great aid in this mechanical preparation of the^soil. 
The chief pui-pose of his tillage is to enable the soil to hold plant roots gently 
but firmly, and to enable the air and water to move about freely in it. Even 
when he manures the gromid he has this mechanical preparation in view. 
For fai-myard manure benefits clay soils by subdividing them and making 
them lighter and more open, no less than by enriching them chemically; while 
to sandy soils it gives a much needed firmness of texture, and helps them, 

character of 
the soil. 




The greater part of the soil in old countries owes much of 
its character to human action ; all that lies just below the 
surface has in it a large element of capital, the produce of 
man's past labour : the inherent properties of the soil, the free 
gifts of nature, have been largely modified ; partly robbed and 
partly added to by the work of many generations of men. 

But it is diflferent with that which is above the surface. 
Every acre has given to it by nature an annual income of 
heat and light, of air and moisture ; and over these man has 
but little control. He may indeed alter the climate a little 
by extensive drainage works or by planting forests, or cutting 
them down. But, on the whole, the action of the sun and 
the wind and the rain are an annuity fixed by nature for each 
plot of land. Ownership of the land gives possession of this 
annuity : and it also gives the space required for the life and 
action of vegetables and animals ; the value of this space 
being much affected by its geographical position. 

mechanically as well as chemically, to hold the materials of plant food which 
would otherwise be quickly washed out of them. 

^ Chemically the soil must have the inorganic elements that the plant wants 
in a form palatable to it. The greater part of the bulk of the plant is made up 
of so-caUed "organic compounds"; that is, compounds of carbon chiefly with 
oxygen, hydrogen and nitrogen; and of these it obtains by far the greater 
part from air and water. Only a small fraction (somewhere about a twentieth 
on an average) of its diy bulk consists of mmeral matter that it cannot get 
except from the soU. And as most soils have given them by nature at least 
some small quantities of all the mineral substances that are necessary for 
plant life, they can support some sort of vegetation without human aid Often 
however they have but very scanty provision of one or two necessary 
elements; and then man can turn a barren into a very fertile soil by adding a 
small quantity of just those things that are needed ; using in most cases either 
hme m some of its many forms, or those artificial manures which modern 
chemical science has provided in great variety. 


BOOK IV. CH. IT. § 2. 

"We may then continue to use the ordinary distinction 
Ori inaiand between the original or inherent properties, 
artificial pro- which the land derives from nature, and the 
pertiesofiand. ^^^^^^^^ properties which it owes to human 

action; provided we remember that the first include the 
space-relations of the plot in question, and the annuity that 
nature has given it of sunlight and air and rain ; and that in 
many cases these are the chief of the inherent properties of 
the soil. It is chiefly from them that the ownership of 
agricultural land derives its peculiar significance, and the 
Theory of Rent its special character. But the question how 
far the fertility of any soil is due to the original properties 
given to it by nature, and how far to the changes in it made 
by man, cannot be fully discussed without taking account of 
the kind of produce raised from it. 






§ 1. The law of (or statement of tendency to) diminishing 
return as applied to land is : — ■ 

An increase in the capital and labour applied in the cul- 
tivation of land causes in general a less than ^j^^ ^^^ ^^ 
proportionate increase in the amount of produce diminishing 

1 return. 


We learn from history and by observation that every 
agriculturist in every age and clime desires to have the use 
of a good deal of land ; and that when he cannot get it 
freely, he will pay for it, if he has the means. If he thought 
that he would get as good results by applying all his capital 
and labour to a very small piece, he would not pay for any 
but a very small piece. 

When land that requires no clearing is to be had for 
nothing, every one uses just that quantity which he thinks 
will give his capital and labour the largest return. His 
cultivation is ''extensive," not "intensive." He does not aim 
at getting many bushels of corn from each acre ; he tries to 
get as large a total crop as possible with a given j^ • v^ 
expenditure of seed and labour ; and therefore general expe- 

1 1 i 1 • rience. 

he SOWS as many acres as he can manage to bring 
under a light cultivation. Of course he may go too far : he 
may spread his work over so large an area that he would 
gain by concentrating his capital and labour on a smaller 

space; and under these circumstances if he could get com- 
mand over more capital and labour so as to apply more to 
each acre, the land would give him an Increasing lieturn ; 
that is, an extra return larger in proportion than it gives to 
his present expenditure. But if he has made his calculations 
rightly, he is using just so much ground as will give him the 
highest return; and he would lose by concentrating his capital 
and labour on a smaller area. If he had command over more 
capital and labour and were to apply more to his present 
land, he would gain less than he would by taking up more 
land ; he would get a Diminishing Return, that is, an extra 
return smaller in proportion than he gets for the last applica- 
tions of capital and labour that he now makes, provided of 
course that there is meanwhile no perceptible improvement 
in his agricultural skill. As his sons grow up they will have 
more capital and labour to apply to land; and in order to avoid 
obtaining a Diminishing Return, they will want to cultivate 
more land. But perhaps by this time all the neighbouring 
land is already taken up, and in order to get more they must 
buy it or pay a rent for the use of it, or migrate where they 
can get it for nothing. 

This tendency to a Diminishing Return was the cause of 
Abraham's parting from Lot, and of most of the migrations 
of which history tells. And wherever the right 
to cultivate land is much in request, we may be 
sure that the tendency to a Diminishing Return 
is in full operation. Were it not for this tendency every 
farmer could save nearly the whole of his rent by giving up 
all but a small piece of his land, and bestowing all his capital 
and labour on that. If all the capital and labour which he 
would in that case apply to it, gave as good a return in 
proportion as that which he now applies to it, he would get 
from that plot as large a produce as he now gets from his 
whole farm, and would make a net gain of all his rent save 
that of the little plot that he retained. 

Its relation to 





It may be conceded that the ambition of farmers often 
leads them to take more land than they can properly manage. 
But when we say that a farmer would gain bv 

, . , . -1 1 1 , 1 •'Its relation to 

applying his capital and labour to a smaller area, modem 
we do not necessarily mean that he would get ^^'■"^'"e:- 
a larger gross produce; we may mean only that the saving 
in rent would more than counter-balance any probable dimi- 
nution of the total returns that he got from the land. If a 
farmer pays a fourth of his produce as rent, he would gain 
by concentrating his capital and labour on less land, provided 
the extra capital and labour applied to each acre gave any- 
thing more than three-fourths as goo<l a return in proportion 
as he got from his earlier expenditure. 

Again, it may be granted that much land, even in a 
country as advanced as England, is so unskilfully cultivated 
that it could be made to give more than double its present 
gross produce if twice the present capital and labour were 
applied to it skilfully. Very likely those are right who 
maintain that if all English farmers were as able, wise and 
energetic as the best are, they might profitably apply twice 
the capital and labour that is now applied. Assuming rent 
to be one fourth of the present produce, they might get seven 
hundredweight of produce for every four that they now get: 
it is conceivable that with still more improved methods they 
might get eight hundredweight, or even more. But this does 
not prove that, as things are, further capital and labour 
could obtain from land an Increasing Return. The fact 
remains that, taking famiers as they are, with the skill and 
energy which they actually have, we find as the result of 
universal observation that there is not open to them a short 
road to riches by giving up a great part of their land, by 
concentrating all their capital and labour on the remainder, 
and saving for their own pockets the rent of all but that 
remainder. The reason why they cannot do this is told in 
the Law of Diminishing Return. 


BOOK IV. CH. III. ^ 1, 2. 

It IS iJiiportant to remember that tlie Return to capital 

The Law re- '"'"^ ^'^^'''' ^^ ^^^^^ ^^^ Law speaks, is measured 
lates to the by the amount of the produce raised independently 

amount of the -Pi,! * J 

produce. ^^ ^^y Changes that may meanwhile take place in 

the price of produce ; such, for instance, as might 
occur if a new railway had been made in the neighbourhood, 
or a new town population had grown up close by. Such 
• changes will be of vital importance when we come to draw 
inferences from the Law of Diminishing Return, and par- 
ticularly when we discuss the pressure of increasing population 
on the means of subsistence. But they have no bearing on 
the Law Itself, because that has to do not with the value of 
the produce raised, but only with its amount. 

We may now formulate the limitations which were im- 
plied under the woi-ds "in general" in our provisional state- 
ment of the Law. The Law is a statement of a tendency 
which may indeed be held in check for a time by improve- 
ments in the arts of production and by the fitful course of the 
development of the full powers of the soil; but which must 
ultunately become irresistible if the demand for produce 
should increase without limit. Our final statement of the 
Law may then be divided into two parts, thus:— 

Firstly, although an improvement in the arts of agricul- 
Finai state- *"^® ^^Y ^^isc the rctum which land generally 
mentofthe affords to any given amount of capital and 
labour; and although the capital and labour 
already applied to any piece of land may have been so in- 
adequate for the development of its full powei-s, that some 
further expenditure on it even with the existing arts of 
agriculture would give a more than proportionate return- 
yet these conditions are rare in an old country : and, except 
when they are present, the application of increased capital 
and labour to land will add a less than proportionate amount 
to the produce raised, unless there be meanwhile an increase 
m the skill of the individual cultivator. Secondly, whatever 



may be the future developments of the arts of agriculture, a 
continued increase in the application of capital and labour to 
land must ultimately result in a diminution of the extra 
produce which can be obtained by a given extra amount of 
capital and labour. '^ 

§ 2. Making use of a term suggested by James Mill, we 
may regard the capital and labour applied to 
land as consisting of equal successive Doses'. As capitarand 
we have seen, the return to the first few doses ^^^°"'"- 
may perhaps be small and a greater number of doses may get 
a larger proportionate return ; the return to successive doses 
may even in exceptional cases alternately rise and fall. But 
our law states that sooner or later (it being always supposed 
that there is meanwhile no change in the arts of cultiva- 
tion) a point will be reached after which any further dose 
will obtain a less proportionate return than the preceding 

The dose which only just remunerates the cultivator may 
be said to be the marginal dose, and the return 
to it the marginal return. If there happens to mlrglnS^''^^' 


be in the neighbourhood land that is cultivated turn, margin of 
but only just pays its expenses, and so gives no 
surplus for rent, we may suppose this dose applied to it. 
We can then say that the dose applied to it is applied to 
land on the margin of cultivation, and this way of speakinn^ 
has the advantage of simplicity. But it is not necessary 
for the argument to suppose that there is any such land: 
what we want to fix our minds on is the return to the 
marginal dose: whether it happens to be applied to poor 
land or to rich does not matter; all that is necessary is that it 

1 The phrase a Dose of Capital and Lahonr may be taken provisioually to 
mean £1 of outlay distributed according to the exigencies of the case between 
the hu-e of labour, the payment for the use and the wear and tear of capital 
and lastly for management. Some difficulties connected with the phrase ai-e 
discussed in a Note at the end of Principles, IV. m. 



should be the last dose which can profitably be applied to that 

When we speak of the marginal, or the "last" dose applied 

to the land, we do not mean the last in time, we 
dos'L Tot^^'ne- mean that dose which is on the margin of pro- 
i"st^^n'umf ^ iitable expenditure; that is, which is appHed so 

as just to give the ordinary returns to the capital 

and labour of the cultivator, without affording any surplus. 

To take a concrete instance, we may suppose a farmer to be 

thinking of sending the hoers over a field once more; and 

after a little hesitation he decides that it is worth his while, 

but only just worth his while to do it. The dose of capital 

and labour spent on doing it, is then the last dose in our 

present sense, though there are many doses still to be applied 

in reaping the crop. Of course the return to this last dose 

cannot be separated from the others; but we ascribe to it all 

that part of the produce which we believe would not have 

been produced if the farmer had decided against the extra 

hoeing. Since the return to the marginal dose (it does not 

matter whether the dose is applied to poor land or rich) 

Surplus Pro- just remunerates the cultivator, it follows that he 

**"'^*' will be just remunerated for the whole of his 

capital and labour by as many times the marginal return as he 

has applied doses in all. Whatever he gets in excess of this 

is the Surplus Produce of the land. This surplus is retained 

by the cultivator if he owns the land himself ^. 

1 Kicardo was well aware of this : though he did not emphasize it enough. 
Those opponents of his doctrine who have supposed that it has no applica- 
tion to places where all the land pays a rent, have mistaken the nature of his 

2 Let us seek a graphical illustration. If on any given field there were 
expended a capital of £50, a certain amount of produce would he raised from 
it: a certain amount larger than the former would be raised if there were 
expended on it a cai)ital of £51. The difference between these two amounts 
may be regarded as the produce due to the fifty-first pound ; and if we suppose 
the capital to be appUed in successive doses of £1 each we may speak of this 
difference as the produce due to the fifty-first dose. Let the dosea be repre- 



(This Surplus Produce may, under certain conditions, 
become the rent which the owner of the land can its relation to 
exact from the tenant for its use. But, as we *"*"*• 
shall see hereafter, the full rent of a farm in an old country 
is made up of three elements: the first being due to the value 
of the soil as it was made by Nature; the second to improve- 
ments made in it by man; and the third, which is often the 
most important of all, to the growth of a dense and rich 
population, and to facilities of communication by public roads, 
railroads, &c.) 

In an old country it is seldom possible to discover what 
was the original state of the land before it was first culti- 
vated. The results of some of man's work are for good and 
evil fixed in the land; they cannot be distinguished from the 
results of nature's work, but must be counted with them. 
The line of division between nature's work and man's work is 
blurred, and must be drawn more or less arbitrarily. But 
for most purposes it is best to regard the first difiiculties of 
coping with nature as pretty well conquered before we begin 
to reckon the farmer's cultivation. Thus the returns that we 

Fig. (3). 

sented in order by successive equal divisions of the 
line OD. Let there now be drawn from the division 
of this line representing the fifty-first dose M, a Ime 
MP at right angles to OD, in thickness equal to the 
length of one of the divisions, and such that its 
length represents the amount of the produce due to 
the fifty-first dose. Suppose this done for each 
separate division up to that corresponding to the 
last dose which it is found profitable to put on the 
land. Let this last dose be the 110th at D, and DC the corresponding return 
that only just remunerates the fanner. The extremities of such lines will lie 
on a cmve APC, The gross produce will be represented by the siun of these 
imes: i.e. smce the thickness of each line is equal to the length of the division 
on which It stands, by the area ODCA. Let CGH be drawn parallel to DO, 
cutting PMm G; then MG is equal to CD; and since DC just remunerates 
the farmer for one dose, MG wiU just remmierate him for another: and so for 
all the portions ofHhe thick vertical lines cut off betwe^en OD and HC There- 
fore the sum of these that is, the area ODCH, represents the share of the 
produce that is required to remunerate him ; whUe the remainder, AIIGCPA, 
13 the Surplus Produce, which under certain conditions becomes the rent. 
M. ij 






should be the last dose which can profitably be applied to that 

When we speak of the marginal, or the "last" dose applied 

to the land, we do not mean the last in time, we 

dos^e Tot^^'ne- i^^an that dose which is on the margin of pro- 

cessariiy the fitable expenditure: that is, which is applied so 

last in time. . • i i 

as just to give the ordinary returns to the capital 

and labour of the cultivator, without affording any surplus. 

To take a concrete instance, we may suppose a farmer to be 

thinking of sending the hoers over a field once more; and 

after a little hesitation he decides that it is worth his while, 

but only just worth his while to do it. The dose of capital 

and labour spent on doing it, is then the last dose in our 

present sense, though there are many doses still to be applied 

in reaping the crop. Of course the return to this last dose 

cannot be separated from the others; but we ascribe to it all 

that part of the produce which we believe would not have 

been produced if the farmer had decided against the extra 

hoeing. Since the return to the marginal dose (it does not 

matter whether the dose is applied to poor land or rich) 

Surplus Pro- j^*^* remunerates the cultivator, it follows that he 

^^^^' will be just remunerated for the whole of his 

capital and labour by as many times the marginal return as he 

has applied doses in all. Whatever he gets in excess of this 

is the Surplus Produce of the land. This surplus is retained 

by the cultivator if he owns the land himself \ 

1 Ricardo was well aware of this : though he did not emphasize it enough. 
Those opponents of his doctrine who have supposed that it has no applica- 
tion to places where all the land pays a rent, have mistaken the nature of his 

2 Let us seek a graphical illustration. If on any given field there were 
expended a capital of £50, a certain amount of produce would he raised from 
it: a certain amount larger than the former would be raised if there were 
expended on it a capital of £51. The difference between these two amounts 
may be regarded as the produce due to the fifty-first pound ; and if we suppose 
the capital to be applied in successive doses of £1 each we may speak of this 
difference as the produce due to the fifty-first dose. Let the doses be repre- 

(This Surplus Produce may, under certain conditions, 
become the rent which the owner of the land can ns relation to 
exact from the tenant for its use. But, as we •"*"*• 
shall see hereafter, the full rent of a farm in an old country 
is made up of three elements: the first being due to the value 
of the soil as it was made by Nature; the second to improve- 
ments made in it by man; and the third, which is often the 
most important of all, to the growth of a dense and rich 
population, and to facilities of communication by public roads, 
railroads, <fec.) 

In an old country it is seldom possible to discover what 
was the original state of the land before it was first culti- 
vated. The results of some of man's work are for good and 
evil fixed in the land; they cannot be distinguished from the 
results of nature's work, but must be counted with them. 
The line of division between nature's work and man's work is 
blurred, and must be drawn more or less arbitrarily. But 
for most purposes it is best to regard the first difiiculties of 
coping with nature as pretty well conquered before we begin 
to reckon the farmer's cultivation. Thus the returns that we 

Fig. (3). 

sented in order by successive equal divisions of the 

line OD. Let there now be drawn from the division 

of this Una representing the fifty-first dose M, a hne 

MP at right angles to OB, in thickness equal to the 

length of one of the divisions, and such that its 

length represents the amount of the produce due to 

the fifty-first dose. Suppose this done for each 

separate division up to that corresponding to the 

last dose which it is found profitable to put on the 

land. Let this last dose be the 110th at I), and DC the corresponding return 

that only just remunerates the farmer. The extremities of such lines wUl lie 

on a curve A PC. The gross produce will be represented by the sum of these 

imes : i.e. smce the thickness of each Ime is equal to the length of the division 

on which it stands, by the area ODCA. Let CGH be drawn parallel to DO. 

cutting PAf in G; then MG is equal to CD; and since DC just remunerates 

the farmer for one dose, MG wiU just remimerate him for another: and so for 

all the portions of>the thick vertical lines cut off between OD and HC. There- 

fore the sum of these, that is, the area ODCH, represents the share of the 

produce that is required to remunerate him ; while the remamder, AIIGCP 1, 

IS the Surplus Produce, which under certam conditions becomes the rent 

M. J 


Book iv. ch. hi. ^ 3—4. 

Order of rela- 
tive fertility 
may change 
with circum- 

count as due to the first doses of capital and lalx)ur are 
generally the largest of all, and the tendency of the return to 
diminish shows itself at once. Having English agriculture 
chiefly in view, we may fairly take, as Ritardo did, this as the 
typical case\ 

§ 3. There is no absolute measure of the richness or 
fertility of land. Even if there be no change in 
the arts of production, a mere increase in the 
demand for produce may invert the order in 
which two adjacent pieces of land rank as re- 
gards fertility. The one which gives the smaller produce, 
when both are uncultivated, or when the cultivation of both 
is equally slight, may rise above the other and justly rank 
as the more fertile when both are cultivated with equal 
thoroughness. In other words, many of those lands which are 
the least fertile when cultivation is merely extensive, become 
among the most fertile when cultivation is intensive. 

It has been well said that as the strength of a chain is 
that of its weakest link, so fertility is limited by that element 
in which it is most deficient. Those who are in a huny, will 
reject a chain which has one or two very weak links, however 
strong the rest may be; and prefer to it a much slighter 
chain that has no flaw. But if there is heavy work to be 
done, and they have time to make repairs, they will set the 
larger chain in order, and then its strength will exceed that 
of the other. In this we find the explanation of much that 
is apparently strange in agricultural history. 

The first settlers in a new country generally avoid land 

Favourite ^^^ich does not lend itself to immediate culti- 

soiis of early vation. They are often repelled by the very 

luxuriance of natural vegetation, if it happens 

to be of a kind that they do not want. They do not care to 

1 That is, we may substitute (fig. 3) the dotted line BA' for BA and 
regard A'BPC as the typical curve for the return to capital and labour applied 
In English agriculture. 



plough land that is at all heavy, however rich it might 
become if thoroughly worked. They will have nothing to do 
with water-logged land. They generally select light land 
which can easily be worked with a double plough, and then 
they sow their seed broadly, so that the plants when they 
grow up may have plenty of light and air, and may collect 
their food from a wide area. 

We cannot then call one piece of land more fertile than 
another till we know something about the skill „_,.,. . 

. ° Fertility is re- 

and enterprise of its cultivators, and the amount lative to place 
of capital and labour at their disposal ; and till *"** *'™'* 
we know whether the demand for produce is such as to make 
intensive cultivation profitable with the resources at their 
disposal. If it is, those lands will be the most fertile which 
give the highest average returns to a large expenditure of 
capital and labour ; but if not, those will be the most fertile 
which give the best returns to the first few doses. The term 
fertility has no meaning except with reference to the special 
circumstances of a particular time and place. 

§ 4. But further, the order of fertility of different soils is 
liable to be changed by changes in the methods of cultivation 
and in the relative values of different crops. Thus when at 
the end of last century Mr Coke showed how to grow wheat 
well on light soils by preparing the way with clover, they rose 
relatively to clay soils; and now though they are still some- 
times called from old custom "poor," some of them have a 
higher value, and ai-e really more fertile, than much of the 
land that used to be carefully cultivated while many of the 
light soils were left in a state of nature. 

As there is no absolute standard for fertility, so there is 
none of good cultivation. The best cultivation 
in the richest parts of the Channel Islands, for tion a relative 
instance, involves a lavish expenditure of capital *^'''"' 
and labour on each acre : for they are near good markets and 
have a monopoly of an equable and early climate. If left to 





BOOK IV. CH. III. SS 5—6. 

nature, the land would not be very fertile ; for, though it has 
many virtues, it has two weak links (being deficient in phos- 
phoric acid and potash). But, partly by the aid of the abund- 
ant seaweed on its shores, these links can be strengthened, 
and the chain thus becomes exceptionally strong. Intense, or 
as it is ordinarily called in England "good" cultivation, will 
thus raise £100 worth of early potatoes from a single acre. 
But an equal expenditure per acre by the farmer in Western 
America would ruin him; relatively to his circumstances it 
would not be go<xl, but bad cultivation '. 

§ 5. The statement of the Law of Diminishing Return by 
Ricardo and other English economists in the earlier half of 
this century, was inexactly worded. They stated that the 
first settlers in a new country invariably chose the richest 
lands, and that as population increased, poorer and poorer 
soils were gradually brought under cultivation, speaking care- 
lessly as though there were an absolute standard of fertility. 
But as we have already seen, where land is free, everyone 
chooses that which is best adapted for his own purpose, and 
that which will give him, all things considered, the best return 
for his capital and labour. He looks out, therefore, for land 
that can be cultivated at once, and passes by land that has 
any weak links in the chain of its elements of fertility, how- 
ever strong it may be in some other links. But besides 
having to avoid malaria, he must think of his communication 
with his markets and the base of his resources ; and in some 
cases the need for security against the attacks of enemies and 
wild beasts outweighs all other considerations. It is therefore 
not to be expected that the lands which were first chosen, 
should turn out always to be those which ultimately come to 
be regarded as the most fertile. 

1 The changes in the relative fertilities of diflPerent kinds of land, which 
result from changes in the arts of production and the general economic condi* 
tion of the people are examined a good deal more fully and with the aid of 
graphic illustrations in Principles, IV. in. 3, 4. 




The isolated farmer suffers many hardships, which diminish 
as a village grows up near him ; and when that expands into 
a large industrial centre, his gain is much greater. All his 
produce will be worth more; some things which he used to 
throw away will fetch a good price. He will find new 
openings in dairy farming and market gardening ; and with a 
larger range of produce he will make use of rotations that 
keep his land always active without denuding it of any of the 
elements that are necessary for its fertility. But here we are 
passing away from the causes which determine the amount of 
a farmer's produce, to those which determine its exchange 
value in terms of the things offered for it by the neighbouring 
industrial population. We are passing away from the explan- 
ation of the law of diminishing return and beginning to 
study its applications. 

Even when cultivation has reached a stage after which 
each successive dose applied to a field would get a less amount 
of return than the preceding dose, it may be possible for an 
increase in the population to cause a more than proportional 
increase in the means of subsistence derived from it. The 
evil day is indeed only deferred : but it is deferred. The 
growth of population, if not checked by other causes, must 
ultimately be checked by the difficulty of obtaining raw 
produce ; but in spite of the Law of Diminishing Return, the 
pressure of population on the means of subsistence may be 
restrained for a long time to come by the opening up of new 
fields of supply, by the cheapening of railway and steamship 
communication, and by the growth of organization and know- 

In the following chapters we shall have much to say about 
the evil effects of local congestions of population in making it 
difficult to get fresh air and light, and in some cases frlsh 
water. Again, natives of New England who have gone to 
the fertile plains of the West, would often be willing to barter 
part of their heavy crops for the pure water which the barren 



5, 6. 

granite soil of their old homes supplied ; and even in England 
there are many places, particularly at the sea-side, which are 
kept poor by the want of drinking water. 

§ 6. In river-fisheries, the extra returns to additional 
doses of capital and labour show a rapid diminution. As to 
the sea, opinions differ. Its volume is vast, and fish are very 
prolific ; and it may be true, as some think, that a practically 
unlimited supply can be drawn from the sea without appreci- 
ably affecting the numbers that remain. 

The produce of mines again, among which may be 
The return reckoned quarries and brickfields, is said to 
from fisheries conform to the Law of Diminishing Returji ; 
but this statement is misleading. The produce 
of the field is something other than the soil; for the field, 
properly cultivated, retains its fertility, but the produce of 
the mine is part of the mine itself. The supply of agricultural 
produce and of fish is a perennial stream ; mines are as it 
were Nature's reservoir. The more nearly a reservoir is 
exhausted, the greater is the labour of pumping from it ; but 
if one man with one pump could pump it out in ten days, 
ten men with ten pumps could pump it out in one day: 
and when once empty, it would yield no more. So the mines 
that are being opened this year might just as easily have been 
opened many years ago : if the plans had been properly laid 
in advance, and the requisite specialized capital and skill got 
ready for the work, ten years' supply of coal might have been 
raised in one year without any increased difficulty ; and when 
a vein had once given up its treasure, it could produce no more. 

There is, however, increasing difficulty in obtaining a 
further supply of minerals, except in so far as we obtain 
increased power over Nature's stores through improvements 
in the arts of mining, and through better knowledge of the 
contents of the earth's crust; and there is no doubt that, 
other things being equal, the continued application of capital 
and labour to mines will result in a diminishing rate of yield. 






§ 1. Man is the chief means of the production of that 
wealth of which he is himself the ultimate aim ; and it seems 
best to make at this stage some study of the growth of popu- 
lation in numbers, in strength and in character. 

In the animal and vegetable world the growth of num- 
bers is governed simply by the tendency of individuals to 
propagate their species on the one hand, and on the other 
hand by the struggle for life which thins out vast numbers 
of the young before they arrive at maturity. In the human 
race alone the conflict of these two opposing forces is com- 
plicated by the influences of forethought and self-control, of 
prudence and a sense of duty. 

The study of the growth of population is often spoken of 
as though it were a modern one ; but in a more or less vague 
form it has occupied the attention of thoughtful men in all 
ages of the world. We may however confine ourselves here to 
some account of its most famous student, Malthus, whose 
Essay on the PHnciple of Population is the starting point of 
all modern speculations on the subject \ 

His reasoning consists of three parts which must be kept 

distinct. The first relates to the supply of labour. 

T. /. 1 1 /. /. rr J Malthus. 

By a careful study of facts he proves that every 

people of whose history we have a trustworthy record, has 

been so prolific that the growth of its numbers would have 

been rapid and continuous if it had not been checked either 

1 First edition 1798 : he published a much enlarged and improved edition 
in 1803. The history of the Doctrine of Population, and of its connection with 
the practical needs of different nations at different times, is sketched in Prin- 
ciples, IV. ni. 1, 2. 


BOOK IV. CH. IV. §§ 1, 2. 

by a scarcity of the necessaries of life, or some other cause, 
that is, by disease, by war, by infanticide, or lastly by volun- 
tary restraint. 

His second position relates to the demand for labour. 
Like the first it is supported by facts, but by a different set 
of facts. He shows that up to the time at which he wrote 
no country (as distinguished from a city, such as Rome or 
Venice,) had been able to obtain an abundant supply of the 
necessaries of life after its territory had become very thickly 
peopled. The produce which Nature returns to the work of 
man is her effective demand for population : and he shows 
that up to this time a rapid increase in population, when 
already thick, had not led to a proportionate increase in this 

Thiixlly, he di-aws the conclusion that what had been in 
the past, was likely to be in the future ; and that the growth 
of population would be checked by poverty or some other 
cause of suffering, unless it were checked by voluntary re- 
straint. He therefore urges people to use this restraint, and, 
while leading lives of moral purity, to abstain from veiy early 


The changes which the course of events has introduced 

into the doctrine of population relate chiefly to the second and 

thiixi steps of his reasoning. We have already noticed that the 

English economists of the earlier half of this century overrated 

the tendency of an increasing population to press upon the 

means of subsistence. It was indeed not their fault that they 

could not foresee the vast developments of steam transport by 

land and by sea, which have enabled Englishmen of the present 

generation to obtain the products of the richest lands of the 

earth at comparatively small cost. But the fact that Malthus 

did not foresee these changes makes the second and third steps 

of his argument antiquated in form; though they are still 

in a great measure valid in substance. We may then proceed 

to state the doctrine of population in its modem foi-m. 




§ 2. The growth in numbers of a people depends firstly 
on the "natural increase," that is, the excess of Natural in- 
their births over their deaths ; and secondlv on *=^«^se and mi- 

,. ^ gration. 


The number of births depends chiefly on habits relating 
to marriage. The age of marriage varies with the climate, 
being earlier in warm climates than in cold; but in every case 
the longer marriages are postponed beyond the age that is 
natural to the climate, the smaller is the birth-rate. Given 
the climate, the average age of marriage depends 
chiefly on the ease with which young people can ing^the \z^^oi 
establish themselves, and support a family accord- "™^"'*e«- 
ing to the standard of comfort that prevails amoncr their 
friends and acquaintances; and therefore it is different in 
different stations of life. 

In the middle classes a man's income seldom reaches its 
maximum till he is forty or fifty years old; and 
the expense of bringing up his children is heavy differen°t"^ *" 
and lasts for many years. The artisan earns *=^*^^"- 
nearly as much at twenty-one as he ever does, unless he rises 
to a responsible post, but he does not earn much before he is 
twenty-one: his children are likely to be a considerable ex- 
pense to him till about the age of fifteen; unless they are 
sent into a factory, where they may pay their way at a very 
early age; and lastly the unskilled labourer earns nearly full 
wages at eighteen, while his children begin to pay their own 
expenses very early. In consequence, the average age at 
marriage is highest among the middle classes: it is low 
among the artisans and lower still among the unskilled 

Unskilled labourers, when not so poor as to suffer actual 
want and not restrained by any external cause, have seldom, 
if ever, shown a lower power of increase than that of doubling 
in thirty years; that is, of multiplying a million-fold in six 
hundred years, a billion-fold in twelve hundred: and hence it 





BOOK IV. CH. IV. 5§ 2 — 4. 

might be inferred a prioH that their increase has never gone 
on without resti-aint for any considerable time. This in- 
ference is conlinned by the teaching of all history. Through- 
out Europe during the Middle Ages, and in some parts of 
it even up to the present time, unmarried labourers have 
usually slept in the farm-house or with their parents ; while a 
Hindrances to i^^irried pair have generally required a house for 
early marri- themselves: when a village has as many hands 

age in station- . ° J 

ary rural as it Can well employ, the number of houses is not 

increased, and young people wait as best they can. 
There are many parts of Europe even now in which custom, 
exercising almost the force of law, prevents more than one son 
in each family from marrying; he is generally the eldest, but 
in some places the youngest: if any other son marries, he 
must leave the village. When great material prosperity, and 
the absence of all extreme poverty are found in old-fashioned 
corners of the Old World, the explanation generally lies in 
some such custom as this with all its evils and hardships. 

§ 3. In this respect the position of the hired agricultural 
Influence of labourer has changed very much. The towns are 
peasant now always open to him and his children; and if 

properties. ^le betakes himself to the New World he is likely 
to succeed better than any other class of emigrants. But the 
gradual rise in the value of land and its growing scarcity are 
tending to check the increase of population in some districts 
in which the system of peasant properties prevails ; especially 
those in which there is not much entei-prise for opening out 
new trades or for emigration, and parents feel that the social 
position of their children will depend on the amount of their 

On the other hand there seem to be no conditions more 
favourable to the rapid growth of numbers than those of the 
agricultural districts of new countries. Land is to be had 
in abundance, railways and steamships carry away the produce 
of the land ; and they bring back in exchange implements of 




advanced types, and many of the comforts and luxuries of life. 
The "farmer," as the peasant proprietor is called in America, 
finds therefore that a large family is not a bui-den, but an 
assistance to him. He and they live healthy out-of-door lives; 
there is nothing to check, but everything to stimulate the 
growth of numbers. The natural increase is aided by immi- 
gration; and thus, in spite of the fact that some classes of the 
inhabitants of large cities in America are, it is said, reluctant 
to have many children, the population has increased sixteen- 
fold in the last hundred years. 
iYn^ § 4- The growth of population in England has a more 
clearly defined histoiy than that in the United Population in 
Kingdom, and we shall find some interest in England, 
noticing its chief movements. 

The restraints on the increase of numbers during the 
Middle Ages were the same in England as else- 
where. In England as elsewhere the religious during Middle 
oixlers were a refuge to those for whom no estab- ^^*'^- 
lishment in marriage could te provided; and religious celibacy 
while undoubtedly acting in some measure as an independent 
check on the growth of population, is in the main to be 
regarded rather as a method in which the broad natural 
forces tending to restrain population expressed themselves 
than as an addition to them. Infectious and contagious 
diseases, both endemic and epidemic, were caused by dirty 
habits of life, which were even worse in England than in the 
South of Europe ; and famines were caused by the failures of 
good harvests and the difficulties of communication, though 
this evil was less in England than elsewhere. Country life 
was, as elsewhere, rigid in its habits ; young people found it 
difficult to establish themselves until some other married pair 
had passed from the scene and made a vacancy in their own 
parish; for, though artisans and domestic retainers moved 
about a good deal, migration was seldom thought of by an 
agricultural labourer. 



BOOK IV. CH. TV. §§ 4, 5. 


In the latter half of the seventeenth and the fii-st half of 
Se nt enth ^^^® eighteenth century the central govennnent 
and eighteenth exerted itself to hinder the adjustment of the 
cen unes. supply of population in different parts of the 

countiy to the demand for it by Settlement Laws, which 
made any one chargeable to a parish who had resided there 
forty days, but ordered that he might be sent home by force 
at any time within that period. Landlords and farmers were 
so eager to prevent people from getting a "settlement" in 
their parish that they put great difficulties in the way of 
building cottages, and sometimes even razed them to the 
ground. In consequence the agricultural population of Eng- 
lan(l was stationary during the hundred years ending with 
1760; while the manufactures were not yet sufficiently 
developed to absorb large numbers. This retardation in the 
growth of numbers was partly caused by, and partly a cause 
of, a rise in the standard of living ; a chief element of which 
was an increased use of wheat in the place of inferior grains 
as the food of the common people. 

From 1760 onwards those who could not establish them- 
selves at home found little difficulty in getting employment 
in the new manufacturing or mining districts, where the 
demand for workers often kept the local authorities from 
enforcing the removal clauses of the Settlement Act. To 
these districts young people resorted freely, and the birth- 
rate in them became exceptionally high; but so did the death- 
rate also; the net result being a fairly rapid growth of popu- 
lation. At the end of the century, when Malthus wrote his 
Essay, the Poor Law again began to influence the age of mar- 
riage, but this time in the direction of making it unduly early. 

«,. . The sufferings of the working classes caused by a 

The nine- '^ » •' 

teenth cen- series of famines and by the French War made 
"^' some measure of relief necessary ; and the need of 

large l)odies of recruits for the army and navy was an ad- 
ditional inducement to tender-hearted people to be somewhat 




liberal in their allowances to a large family, with the practical 
effect of making the father of many children often able to 
procure more indulgences for himself without working than 
he could have got by hard work if he had been unmarried or 
had only a small family. Those who availed themselves most 
of this bounty, were naturally the laziest and meanest of the 
people, those with least self-respect and enterprise. So al- 
though there was in the manufacturing towns a fearful 
mortality, particularly of infants, the quantity of the people 
increased fast; but its quality improved little, if at all, till 
the passing of the New Poor Law in 1834. Since that 
time the rapid growth of the town population has, as we shall 
see in the next Chapter, tended to increase mortality ; but 
this has been counteracted by the growth of temperance, of 
medical knowledge, of sanitation and of general cleanliness. 
Emigration has increased, the age of marriage has been 
slightly raised, and a somewhat less proportion of the whole 
population are married; but, on the other hand, the ratio of 
births to a marriage has risen ; the net result being that popu- 
lation has grown nearly steadily. 
gy^J^ § ^- Early in this century, when wages were low and wheat 
was dear, the working classes generally spent „ ^ 

' _o ° J jr Modern causes 

more than half their income on bread: and con- affecting mar- 
sequently a rise in the price of wheat diminished "*e*-*"**^- 
marriages Very much among them ; that is, it diminished very 
much the number of marriages by banns. But it raised the 
income of many members of the well-to-do classes, and there- 
fore often increased the number of marriages by license. Since 
however these were but a small part of the whole, the net 
effect was to lower the marriage-rate. But as time went on, 
the price of wheat fell and wages rose, till now the working 
classes spend on the average less than a quarter of their in- 
comes on bread ; and in consequence the chief influence on 
the marriage-rate is exercised, not by the price of wheat, but 
by variations of commercial prosperity. 



BOOK IV. CH. IV. § 5. 

Since 1873 though the average real income of the popula- 
tion of England has indeed been increasing, its rate of in- 
crease has been less than in the preceding years. But 
meanwhile there has been a great fall of prices, and con- 
sequently a great fall in the money-incomes of many classes 
of society; and people are governed in their calculations as 
to whether they can aiford to marry or not, more by the 
money income which they expect to be able to get, than by 
elaborate calculations of changes in its purchasing power. 
The standard of living therefore among the working classes 
has been rising rapidly, perhaps more rapidly than at any 
other time in English history : their household expenditure 
measured in money has remained about stationary, and 
measured in goods has increased very fast. The English 
marriage-rate fell from 8-8 per 1000 in 1873, to 7-1 in 1886, 
the lowest rate that has occurred since civil registration 
began ; but it has somewhat risen again since then. 

] Tlie latter Inlf of Prtnctples IV. iv. contains a good many statistical 
tables relating to the growth of population in England, and to a comparison of 
the birtli, death, and marriage-rates of different countries of the Western world 
It IS seen that the marriage-rate is generally highest where the number of 
early marriages is the greatest; and so also is the fecundity of marriages 
The general mortality is high wherever the birth-rate is high 




§ 1. We have next to consider the conditions on which 
depend health and strength, physical, mental and 

1 m_ xi 1 • ^ • 1 "^^^ basis of 

moral. Iney are the basis of industrial effici- industrial effi- 
ency, on which the production of material wealth ^^^^^y- 
depends; while on the other hand the chief importance of 
material wealth lies in the fact that, when wisely used, it 
increases the health and strength, physical, mental and moral 
of the human race. 

In many occupations industrial efficiency requires little else 
than physical vigour ; that is, muscular strength. Physical 
a good constitution and energetic habits. In strength, 
estimating muscular, or indeed any other kind of strength for 
industrial purposes, we must take account of the number of 
hours in the day, of the number of days in the year, and the 
number of years in the lifetime, during which it can be 
exerted. But with this precaution we can measure a man's 
muscular exertion by the number of feet through which his 
work would raise a pound weight, if it were applied directly to 
this use; or in other words by the number of "foot pounds" 
of work that he does'. 

1 This measure can be applied directly to most kindle of navvies' and porters' 
work, and indirectly to many kmds of agricultural work. In a controversy 
that was waged after the great agricultural lock-out as to the relative efficiency 
of unskilled labour in the South and North of England, the most trustworthy 
measure was found in the number of tons of material that a man would load 
into a cart in a day. 




In backward countries, particularly where there is not 
much use of hoi-ses or other draught animals, a great part of 
men's and women's work may be measured fairly well by the 
muscular exertion involved in it. But in England less than 
one-sixth of the industrial classes are now engaged on work 
of this kind ; while the force exerted by steam-engines alone 
is more than twenty times as much as could be done by the 
muscles of all Englishmen. 

Although the power of sustaining great muscular exertion 
General seems to rest on constitutional strength and other 
vigour. physical conditions, yet even it depends also on 
force of will, and strength of character. Energy of this kind, 
which may perhaps be taken to be the strength of the man, as 
distinguished from that of his body, is moral rather than 
physical; but yet it depends on the physical condition of 
nervous strength ^ This strength of the man himself, this 
resolution, energy and self-mastery, or in short this " vigour" 
is the source of all progress : it shows itself in great deeds, in 
great thoughts and in the capacity for true religious feeling. 

§ 2. In discussing the growth of numbers a little has 
been said incidentally of the causes which determine lent^th 
of life : but they are in the main the same as those which 
determine constitutional strength and vigour, and they will 
occupy our attention again in the present chapter. 

The first of these causes is the climate. A warm climate 
is not altogether hostile to high intellectual and 
artistic work : but it prevents people from beinf^ 
able to endure very hard exertion of any kind continued for 
a long time. 

Climate has also a large share in determining the neces- 
The necessa- saries of life; the first of which is food. Food must 
riesofiife. supply the nitrogenous and other elements that 

1 This must be distinguished from nervousness, which, as a rule, indicates 
a general deficiency of nersous strength ; though sometimes it proceeds from 
nervous irritabihty or want of balance. 

Influence of 



are required to build up growing tissues and to repair the 
waste of the body. It must also afford heat, some of which 
can be converted into muscular force; and for this purpose 
carbonaceous food, when it can be properiy digested, is the 
cheapest \ Much also depends on the proper preparation of 
food, and a skilled housewife with ten shillings a week to 
spend on food will often do more for the health and strength 
of her family than an unskilled one with twenty. The great 
infant mortality among the poor is largely due to the want of 
care and judgment in preparing their food ; and those who do 
not entirely succumb to this want of motherly care often grow 
up with enfeebled constitutions. Even in London in the 
seventeenth and eighteenth centuries the mortality was eight 
per cent, greater when corn was dear than when it was cheap : 
and though the increase of wealth and of charity and the 
constant supply of cheap foreign corn has caused the worst 
effects of hunger to cease, yet the want of fitting food is stiU 
a frequent cause of that general weakening of the system 
which renders it unable to resist disease. 

We have already seen that the necessaries for efficiency 
vary with the nature of the work to be done, but we must 
now examine this subject a little more closely. 

As regards muscular work in particular, there is a close 
connection between the supply of food that a man has, and 
his available |trength. If the work is intermittent, as that 
of some dock labourers, a cheap but nutritious grain diet is 
sufficient. But for very heavy continuous strain, such as is 
involved in puddlers' and the hardest navvies' other material 
work, food is required which can be digested and neceYs™r?es."* 
assimilated even when the body is tired. This quality is still 
more essential in the food of the higher grades of labour 
which involve increased nervous strain, though the quantity 
required is generally small. 

1 The nitrogenous elements are most easily got from anrnial food. They 
exist also m vegetable foods; but not in a form that is so easily digested 


BOOK IV. CH. V. §§ 2 — 4. 

After food, the next necessaries of life and labour, are 
clothing, house-room and firing ; when tliey are deficient, the 
mind becomes torpid, and ultimately the physical constitution 
is undennined. 

§ 3. Next come three closely allied conditions of vigour, 
Hope, freedom namely, hopefulness, freedom, and change. All 
and change. history is full of the record of inefliciency caused 
in varying degrees by slavery, serfdom, and other forms of 
civil and political oppression and repression. Freedom and 
hope increase not only man's willingness but also his power 
for work ; physiologists tell us that a given exertion consumes 
less of the store of nervous energy if done under the stimulus 
of pleasure than of pain : and without hope there is no enter- 
prise. Security of person and property are two conditions of 
this hopefulness and freedom ; but security always involves 
restraints on freedom, and it is one of the most difficult prob- 
lems of civilization to discover how to obtain the security, 
which is a condition of freedom, without too great a sacrifice 
of freedom itself. 

Changes of work, of scene, and of personal associations 
bring new thoughts, call attention to the imperfections of old 
methods, stimulate a "divine discontent," and in every way 
develop creative energy. A shifting of places enables the 
more powerful and original minds to find full scope for their 
energies and to rise to important positions : wh^eas those who 
stay at home are often over much kept in their places. Few 
men are prophets in their own land ; neighbours and relations 
are generally the last to pardon the faults and to recognize 
the merits of those who are less docile and more enterprising 
than those around them. It is doubtless chiefly for this reason 
that in almost every part of England a disproportionately 
large share of the best energy and enterprise is to be found 
among those who were bom elsewhere. 

Freedom so far has been regarded as freedom from ex- 
ternal bonds. But that higher freedom, which comes of self- 



mastery, is an even more important condition for the highest 
work. The elevation of the ideals of life on which this de- 
pends, is due on the one side to political and economic causes 
and on the other to personal and religious influences ; amon^ 
which the influence of the mother in early childhood is 

§ 4. Bodily and mental health and strength are much 
influenced by occupation \ At the beginning of t « 

Ai • , ,, ,. . „ " & "*■ Influence of 

tnis century the conditions of factory work were occupation, 
needlessly unhealthy and oppressive for all, and especially for 
young children. But Factory and Education Acts have re- 
moved the worst of these evils from factories ; though many 
of them still linger about domestic industries and the smaller 
workshops. Infant mortality also is diminishing, though there 
remains much room for improvement in this direction. 

The higher wages, the greater intelligence, and the better 
medical facilities of townspeople should cause infant mortality 
to be much lower among them than in the country. But it 
is generally higher, especially where there are many mothers 
who neglect their family duties in order to earn money 

In almost all countries there is a constant migration 
towards the towns. The large towns and espe- 
cially London absorb the very best blood from '^°'^" "'^• 
all the rest of England; the most enterprising, the most 
highly gifted, those with the highest pAy^^we and the strongest 
characters go there to find scope for their abilities. But by 
the time their children and children's children have grown up 

1 Tlie rate of mortality is low among ministers of reUgion and school- 
masters; among the agricultural classes, and in some other industries such as 
tJiose of wheelwrights, shipwrights and coal-miners. It is high in lead and tm 
mmmg m file-makmg and earthenware manufacture. But neither these nor 
any other regular trade show as high a rate of mortahty as is found among 
J.ondon general labourers and costermongers ; while the highest of aU is that 
hnf'fiT *. '" !T' ^T^ occupations are not direcUy injurious to health, 
Dut they attract those who are weak in physique and in character and thev 
encourage irregular habits. »» ler ana mey 


without healtliy play, and without fresh air, there is little 
trace left of their original vigour \ 

There is perhaps no better use of public and private 
money than in providing public parks and playgrounds in 
large cities, in contracting with railways to increase the 
number of the workmen's trains run by them, and in helping 
those of the working classes who are willing to leave the 
large towns to do so, and to take their industries with them; 
while money spent on reducing the cost of living in large 
towns by building workmen's houses at a loss or in other 
ways, is likely to do almost as much harm as good, and some- 
times even more. If the numbers of the working classes in 
the large towns are reduced to those whose work must be 
carried on there, the scarcity of their labour will enable them 
to command high wages ; and therefore if sanitary laws and 
rules against overcrowding are rigidly enforced, and space 
enough is secured to provide opportunities of healthy play 
for their children, those who live in large towns will have a 
better chance of leaving a healthy progeny behind them ; and 
meanwhile some check will be given to the migration from 
the country to the towns. 

§ 5. In the earlier stages of civilization natural selection 
and competition made it the rule that those, who were strongest 
and most vigorous, left the largest progeny behind them. It 
is to this cause, more than any other, that the progress of the 

1 This is seen even in trades that require but little muscular strength; 
only a very small proportion of those artisans to whom London owes its pre- 
erauience as a centre of highly skilled work come from parents who were born 
there ; and there are scarcely any whose grandparents were bom there. 

The death-rate of large towns gives no just indication of their effect on the 
health and vigour of the people ; chiefly because 'many of the town influences 
which lower vigour do not appreciably affect mortality. Other reasons are 
that the immigrants into towns are generally picked Uves and in the full 
strength of youth ; and that yomig people whose parents hve in the comitry 
generally go home to die. The mortality of females in London between the 
ages of fifteen and thirty-five is for this reason abnormally low. 


human race, as of all other forms of life, is due; and though 
in the later stages of civilization the upper 
classes have commonly married late, and in con- ^ency tl^weed 
sequence have had fewer children than the °"* ^^^ weak 
working classes, this has been compensated strong toVu'J! 
for by the fact that among the working classes ''*''' 
themselves the old rule has held; and the vigour of the 
nation that is tending to be damped out among the upper 
classes is thus replenished by the fresh stream of strength 
that is constantly welling up from below. But in France for 
a long time, recently in America, and to a less extent in 
England, there has been some tendency for the abler and 
more intelUgent part of the working class population to 
avoid having large families ; and this is a source of great 

There are increasing reasons for fearing, that though the 
progress of medical science and sanitation is 
saving from death a continually increasing number teracted by""" 
of the children of those who are feeble physically "^"* 
and mentally; yet meanwhile those who are strong, are tending 
to defer their marriages and in other ways to limit the number 
of children whom they leave behind them. The causes are partly 
selfish and partly unselfish; and the former probably do less 
harm than the latter; for perhaps it is best for the worid that 
hard and frivolous people should leave but few descendants 
of their own type. But some people marry late, and have 
few children, in consequence of a desire to secure as good a 
social position as possible for themselves and their children. 
This desire contains many elements that fall short of the 
highest ideals of human aims, and in some cases, a few that 
are distinctly base; but after all it has been one of the chief 
factors of progress, and those who are affected by it include 
many of the best and strongest of the race. Sucli persons, 
having a high sense of duty, are specially likely to be in- 
fluenced by the doctrine that large families are injurious to 


BOOK IV. CH. V. § 5. 

the world and that they can do better for a small than for a 
large family. 

There are other considerations of which account ought to 
Practical con- be taken; but so far as the points discussed in 

elusion. 4.W t, J. , 

this chapter are concerned, it seems primd facie 
advisable that people should not bring children into the world, 
till they can see their way to giving them at least as good an 
education both physical and mental as they themselves had; 
and that it is best to marry moderately early provided there 
IS sufficient self-control to keep the family within the requisite 
bounds without transgressing moral laws. The general adop- 
tion of these principles of action, combined with an adequate 
provision of fresh air and of healthy play for our town 
populations, could hardly fail to cause the strength and vigour 
of the race to improve. And we shall presently find reasons 
for believing that if the strength and vigour of the race 
improves, the increase of numbers will not for a long time 
to come cause a diminution of the average real income of the 

Thus then the progress of knowledge, and in particular 
The forces of of medical science, the ever-growing activity and 

good and evil. • j i? /^ . *^ 

Wisdom of Government m all matters relating to 
health, and the increase of material wealth, all tend to lessen 
mortality and to increase health and strength, and to lengthen 
life. On the other hand, vitality is lowered and the death- 
rate raised by the rapid increase of town life, and by the 
tendency of the higher strains of the population to marry 
later and to have fewer children than the lower. If the 
fonner set of causes were alone in action, but so regulated as 
to avoid the danger of over-population, it is probable that 
man would quickly rise to a physical and mental excellence 
far superior to any that the worid has yet known; while if 
the latter set acted unchecked, he would speedily degenerate. 
As it is, the two sets hold one another very neariy in balance, 
the former slightly preponderating. While the population 



of England continues to increase, those who are out of health 
in body or mind are certainly not an increasing part of the 
whole; and the rest are much better fed and clothed, and 
with a few exceptions are stronger than they were. 

It is sometimes urged that the death-rate in some large 
towns, and especially in London, is not as high as might have 
been anticipated if town life is really injurious to health and 
vigour. But this argument seems untrustworthy, partly 
because many of the town influences which lower vigour, do 
not much affect mortality ; and partly because the majority of 
immigrants into the towns are in the full strength of youth, 
and of more than average energy and courage ; while young 
people whose parents live in the country generally go home 
when they become seriously ill. 

It is not to be concluded from this that the race is degene- 
rating physically, nor even that its nervous strength is on the 
whole decaying. On the contrary the opposite is plainly true 
of those boys and giris who are able to enter freely into 
modem outdoor amusements, who frequently spend holidays 
in the country and whose food, clothing and medical care are 
abundant, and governed by the best modern knowledge. But 
until quite recently the children of the working classes in 
large towns have had a bad time : and it is doubtful whether 
the recent diminution of their hours of labour, the advances 
of sanitation and medical science, improvement of their food 
and clothing, of their education and even in some cases their 
playgrounds quite make up for the evils inherent in town life'. 

1 Manchester and other very large towns are not now growing as fast as 
they were doing earlier in this century. Not only are the centres of such 
towns more and more taken up by warehouses and other buildings which are 
occupied in the day time by people who hve in the suburbs ; but further, 
the medium sized towns and spreading industrial districts are growing fast 
partly at tlie expense of very large towns. This change seems likely to be 
hastened by the growing cheapness and efficiency of the electrical transmission 
of force. 





Unskilled la- 
bour a relative 

1. Having discussed the causes which govern the 
growth of a numerous and vigorous population, we have next 
to consider the training that is required to develop its in- 
dustrial efficiency. 

Very backward races are unable to keep on at any kind 
of work for a long time ; and even the simplest 
form of what we regard as unskilled work is 
skilled work relatively to them ; for they have 
not the requisite assiduity, and they can acquire it only by a 
long course of training. But where education is universal, 
an occupation may fairly be classed as unskilled, though it 
requires a knowledge of reading and writing. Again, in 
districts in which manufactures have long been domiciled, a 
habit of responsibility, of carefulness and promptitude in 
handling expensive machinery and materials becomes the 
common property of all; and then much of the work of tending 
machinery is said to be entirely mechanical and unskilled, 
and to call forth no human faculty that is worthy of esteem! 
But in fact it is probable that not one-tenth of the present 
populations of the world have the mental and moral faculties, 
the intelligence, and the self-control that are required for it': 
perhaps not one half could be made to do the work well 
by steady training for two generations. Even of a manu- 
facturing population only a small part are capable of dointy 



many of the tasks that appear at first sight to be entirely 
monotonous. Machine-weaving, for instance, simple as it 
seems, is divided into higher and lower grades; and most of 
those who work in the lower grades have not "the stuff in 
them" that is required for weaving with several colours. 
And the differences are even greater in industries that deal 
with hard materials, wood, metals, or ceramics. 

Some kinds of manual work require long-continued prac- 
tice m one set of operations, but these cases are not very 
common, and they are becoming rarer: for machinery is con- 
stantly taking over work that requires manual skill of this 
kind. It is indeed true that a general command over the 
use of one's fingers is a very important element of industrial 
efficiency; but this is the result chiefly of nervous strength 
and self-mastery. It is of course developed by training, but 
the greater part of this may be of a general character and 
not special to the particular occupation; just as a good 
cricketer soon learns to play tennis well, so a skilled artisan 
can often move into other trades without any great and 
lasting loss of efficiency. 

Manual skill that is so specialized, as to be wholly in- 
capable of being transferred from one occupation to another, 
IS becoming steadily less and less important. Putting aside 
for the present the faculties of artistic perception and artistic 
creation, we may say that what makes one occupation higher 
than another, what makes the workers of one town or 
country more efficient than those of another, is chiefly a 
superiority in general sagacity and energy which is not 
specialized to any one trade. 

To be able to bear in mind many things at a time, to 
have everything ready when wanted, to act promptly and 
show resource when anything goes wrong, to accommodate 
oneself quickly to changes in details of the work done, to be 
steady and trustworthy, to have always a reserve of force 
which will come out in emergency, these are the qualities 

which make a great industrial people. They are not peculiar 
to any occupation, but are wanted in all; and if they cannot 
always be easily transferred from one trade to other kindred 
trades, the chief reason is that they require to be supple- 
mented by some knowledge of materials and familiarity with 
special processes. 

We may then use the term general Mlity to denote 
General and *^°^® faculties and that general knowledge and 
Specialized intelligence which are in varying degrees the 
common property of all the higher grades of 
industry : while that manual dexterity and that acquaintance 
with particular materials and processes which are required for 
the special purposes of individual trades may be classed as 
specialized ability. 

§ 2. General ability depends largely on the surroundings 
Influence of ^^ childhood and youth. In this the first and far 
the home. the most powerful influence is that of the mother. 
Next comes the influence of the father, of other children, and 
in some cases of servants. As years pass on the child of the 
working man learns a great deal from what he sees and hears 
going on around him; and when we enquire into the ad- 
vantages for starting in life which children of the well-to-do 
classes have over those of artisans, and which these in their 
turn have over the children of unskilled labourers, we shall 
have to consider these influences of home more in detail. 
But at present we may pass to consider the more general in- 
fluences of school education. 

Little need be said of general education; though the in- 
fluence even of that on industrial efliciency is 
greater than it appears. It is true that the 
children of the working classes must very often leave school, 
when they have but learnt the elements of reading, writing, 
arithmetic and drawing; and it is sometimes argued that part 
of the little time spent on these subjects would be better 
given to practical work. But the advance made during 





school-tune is important not so much on its own account, as 
for the power of future advance which a school education 
gives. Reading and writing afford the means of that wider 
intercourse which leads to breadth and elasticity of mind, 
and which is enabling the working man of to-day to be as 
capable a citizen as was the country gentleman of last 
century \ 

§ 3. Technical education used to mean little more than 
imparting that manual dexterity and that ele- ^^^^^. 
mentary knowledge of machinery and processes, ed"ca"tion. 
which an intelligent lad quickly picks up for himself when his 
work has begun; though if he has learnt it beforehand, he can 
perhaps earn a few shillings more at starting than if he had been 
quite ignorant. But such so-called education does not develop 
faculties; it rather hinders them from being developed. A lad, 
who has picked up the knowledge for himself, has educated 
himself by so doing; and he is likely to make better progress 
in the future than one who has been iiaught in a school of this 
old-fashioned kind. Technical education is however outgrowing 
its mistakes ; and is aiming, firstly, at giving a general com"^ 
mand over the use of eyes and fingers ^ (though there are signs 
that this work is being taken over by general education, to 

1 It is true that learning to speD does not educate the faculties to any con- 
siderable extent, and that the time spent on it is nearly wasted. If spelling 
ajid pronunciation could be brought into harmony in the English language, as 
they are in most other languages, children would, it has been estimat^, be 
able to read fluently a year earlier than they can now. 

2 According to the best English opinions, technical education for the 
higher ranks of mdustry should keep the aim of developing the faculties 
almost as constantly before it as general education does. It should rest on 
the same basis as a thorough general education, but should go on to work out 
ui detail specif branches of knowledge for the benefit of particular trades 
Our aim should be to add the scientific traming in which the countries of Western 
Europe are ahead of us to that daring and restless energy and those practical 
instincts, which seldom flourish unless the best years of youth are spent in 
the workshop; recollecting always that whatever a youth learns for himself 
by direct expenence m well-conducted works, teaches him more and stimulates 
his mental activity more than if it were taught him by a master in a technical 
school with model instruments. 



BOOK IV. CH. VI. §§ 3—5. 



which it properly belongs); and secondly at imparting artistic 
skill and knowledge, and methods of investigation, which are 
useful in particular occupations, but are seldom properly 
acquired in the course of practical work. 

The old apprenticeship system is not exactly suited to 

Apprentice- modem conditions and it has fallen into disuse ; 

ships. ijut a substitute for it is wanted. So many and 

various are the branches of any great modem industry that 
it would be impossible for the employers to undertake, as 
they used to do, that every youth committed to their care 
should learn all ; and indeed a lad of ordinary ability would 
be bewildered by the attempt. But the employer might bind 
himself to see that the apprentice is thoroughly taut^ht in the 
workshop all the subdivisions of one great division of his 
trade, instead of letting him learn only one of these subdi- 
visions, as too often happens now. The apprentice's trainin*' 
would then often be as broad as if he had been taught the 
whole of the trade as it existed a few generations ago; and 
it might be supplemented by a theoretical knowledge of all 
branches of the trade, acquired in a technical school. 

§ 4. It is tme that there are many kinds of work which 
can be done as efficiently by an uneducated as by an educated 
Indirect bene- workman : and that the higher branches of edu- 

fits of a good cation are of little direct use except to emplovei-s 

education. , „ ^ f j " 

and loremen and a comparatively small number 

of artisans. But a good education confers great indirect bene- 
fits even on the ordinary workman. It stimulates his mental 
activity ; it fosters in him a habit of wise inquisitiveness ; it 
makes him more intelligent, more ready, more trustworthy in 
his ordinary work ; it raises the tone of his life in working 
hours and out of working hours; it is thus an important 
means towards the production of material wealth ; at the same 
time that, regarded as an end in itself, it is inferior to none of 
those which the pi-oduction of material wealth can be made to 

We must however look in another direction for a part, 
perhaps the greater part, of the immediate economic gain 
which the nation may derive from an improvement in the 
general and technical education of the mass of the people. 
We must look not so much at those who stay in the rank and 
file of the working classes, as at those who rise from a humble 
birth to join the higher ranks of skilled artisans, to become 
foremen or employei-s, to advance the boundaries of science, or 
possibly to add to the national wealth in art and literature. 

The laws which govern the birth of genius are inscmtable. 
It is probable that the percentage of children of 
the working classes, who are endowed with natural muciTnatirai 
abilities of the highest oi-der, is not so ffreat as ability runs to 
that of the children of people, who have attained 
or have inherited a higher position in society. Bufr since the 
manual labour classes are four or five times as numerous as all 
other classes put together, it is not unlikely that more than 
half the best natural genius that is born into the country 
belongs to them ; and of this a great part is fruitless for want 
of opportunity. There is no extravagance more prejudicial to 
the growth of national wealth than that wasteful negligence 
which allows genius that happens to be born of lowly parent- 
age to expend itself in lowly work. No change would conduce 
so much to a rapid increase of material wealth as an improve- 
ment in our schools, and especially those of the middle grades; 
provided it is combined with an extensive system of scholar- 
ships, which will enable the clever son of a working man to 
rise gradually from school to school till he had the best theo- 
retical and practical education which the age can give'. 

§ 5. Most parents are willing enough to do for their 
children what their own parents did for them ; and perhaps 
even to go a little beyond it, if they find themselves among 

1 The influence exerted on national prosperity by education of all kinds 
general, technical and artistic, is now attracting increased attention, and 
England is setting herself to profit by the experiences of other countries in 
this matter. 

w I 


BOOK IV. CH. VI. § 5. 

neighbours who happen to have a rather higher standard. 
But to do more than this requires, in addition 

Sacrifices of , .1 , ,, . "^ ' "' "'—"*"" 

for the to tne moral quahties of unselfishness and a 

»n nf j-L a n' . . ... 

education of 

their children. ^^^^^ ^^ affection that are perhaps not rare, a 
certain habit of mind which is as yet not very 
common. It requires the habit of distinctly realizing the 
future, and of regarding a distant event as of nearly the same 
importance as if it were close at hand,— a habit which is at 
once a chief product and a chief cause of civilization, and is 
seldom fully developed except among the middle and upper 
classes of the more cultivated nations. 

Mill was so much impressed by the difficulties that beset a 
Industrial parent in the attempt to bring up his son to an 
^••^des. occupation widely different in character from his 

own, that he said \-— "So complete, indeed, has hitherto been 
the separation, so strongly marked the line of demarcation 
between the different grades of labourers, as to be almost 
equivalent to an hereditary distinction of caste ; each employ- 
ment being chiefly recruited from the children of those already 
employed m it, or in employments of the same rank with it 
in social estimation, or from the children of persons who if 
originally of a lower rank, have succeeded in raising them- 
selves by their, exertions. The liberal professions are mostly 
supphed by the sons of either the professional or the idle 
classes : the more highly skilled manual employments are filled 
up from the sons of skilled artisans or the class of tradesmen 
who rank with them : the lower classes of skilled employments 
are in a similar case; and unskilled labourers, with occasional 
exceptions, remain from father to son in their pristine con- 
dition. Consequently the wages of each class have hitherto 
been regulated by the increase of its own population, rather 
than that of the general population of the country." 

But he goes on, "The changes, however, now so rapidly 
takmg place in usages and ideas are undermining all these 

1 Book II. ch. XIV. § 2. 





distinctions;" and, since he wrote, the broad lines of division 

which he pointed out have been almost obliterated 

by the rapid action of those causes which, as we twlen g"ade*s 

saw earlier in the chapter, are reducing the *•"* ^^^^^e 

, . away. 

amount of skill and ability required in some occu- 
pations and increasing it in others. We cannot any longer 
regard different occupations as distributed among four great 
planes; but we may perhaps think of them as resembling a 
long flight of steps of unequal breadth, some of them being so 
broad as to act as landing stages. Or even better still we 
might picture to ourselves two flights of stairs, one represent- 
ing the "hard-handed industries" and the other "the soft- 
handed industries;" because the vertical division between 
these two is in fact as broad and as clearly marked as the 
horizontal division between any two grades. 

But though parents generally bring up their children to 
occupations in their own grade, and therefore the Provisional 
total supply of labour in any grade in one gene- conclusion, 
ration is in a great measure determined by the numbers in 
that grade in the preceding generation, yet within the grade 
itself there is greater mobility. If the advantages of any one 
occupation in it rise above the average, there is a quick influx 
of youth from other occupations into the grade. The vertical 
movement from one grade to another is seldom very rapid or 
on a very large scale ; but, when the advantages of a grade 
have risen relatively to the difficulty of the work required of 
it, many small streams of labour, both youthful and adult, 
will begin to flow towards it ; and though none of them may 
be very large, they will together have a sufficient volume to 
satisfy before long the increased demand for labour in that 

We must defer to a later stage a fuller discussion of the 
obstacles which the conditions of any place and time oppose 
to the free mobility of labour, and also of the inducements 
which they offer to anyone to change his occupation or to 


BOOK IV. CH. VI. § 5. 


bring up his son to an occupation different from his own. 
But we have seen enough to conclude that, other things being 
equal, an increase in the earnings that are to be got by labour 
increases its rate of growth ; or, in other words, a rise in its 
demand price increases the supply of it. If the state of know- 
ledge, and of social and domestic habits be given, then the 
vigour of the population, and both the numbers and vigour 
of any trade in particular, may be said to have a supply price 
in this sense, that there is a certain level of the demand price 
which will keep them stationary; that a higher price would 
cause them to increase, and that a lower price would cause 
them to The same proposition holds true as to the 
numbers of population as a whole in nearly all countries. 
But the influence of economic causes on the growth of num- 
bers is very uncertain in its action especially where, as in 
France, all but the very poorest classes lay great store on the 
inheritance of family property. 

During these three chapters we have discussed the supply 
of labour mainly as a means towards the production of ma- 
terial wealth. But here, as in every other economic inquiry, 
we must bear in mind that the only aim of that production 
is the development of the people in numbers, in health, in 
strength, in happiness and above all in character. 




§ 1. The earliest foi-ms of wealth were probably imple- 
ments for hunting and fishing, and personal oma- Early forms of 
ments ; and, in cold countries, clothing and huts, wealth. 
As numbers thickened and the people settled down to agri- 
culture, cultivated land took the first place in the inventory 
of wealth ; and that part of the value of the land which was 
due to improvements (among which wells held a conspicuous 
place) became the chief element of capital, in the narrower 
sense of the term. Next in importance came houses, domesti- 
cated animals, and in some places boats and ships; but the 
implements of production whether for use in agriculture or 
in domestic manufactures remained for a long time of little 
value. During all this time the only trade that used very 
expensive implements was the trade of carrying goods by 
water : the weavers' looms, the husbandman's ploughs and the 
blacksmith's anvils were of simple construction and were of 
little account beside the merchant's ships. But in the eight- 
eenth century England inaugurated the era of expensive 

The implements of the English farmer had been rising 
slowly in value for a long time ; but the progress Modern forms 
was quickened in the eighteenth century. After of wealth, 
a while the use first of water power and then of steam power 
caused the rapid substitution of expensive machinery for in- 
expensive hand tools in one department of production after 
another. As in eariier times the most expensive implements 
were ships and, in some cases, canals for navigation and irri- 





1, 2. 

gation ; so now they are the means of locomotion in general — 
railways and tramways, canals, docks and ships, telegraph and 
telephone systems and water-works : even gas-works mit^ht 
almost come under this head, on the ground that a great part 
of their plant is devoted to distributing the gas. After these 
come mines and iron and chemical works, ship-building yards, 
printing-presses, and other large factories full of expensive 
machinery. And, on whichever side we look, we find that the 
progress and diffusion of knowledge are constantly leading to 
the adoption of new processes and new machinery, which 
economize human effort on condition that some of the effort is 
spent a good while before the attainment of the ultimate ends 
to which it is directed. 

As civilization progresses, man develops new wants, and 
new and more expensive ways of gratifying them. There 
seems to be no good reason for believing that we are anywhere 
near a stationary state in which there will be no new im- 
portant wants to be satisfied ; in which there will be no more 
room for profitably investing present effort in providing for 
"T the future ; and in which the accumulation of wealth will 
cease to have any reward. The whole history of man shows 
that his wants expand with the growth of his wealth and 
knowledge. And with the growth of openings for the in- 
vestment of capital there is a constant increase in that surplus 
of production over the necessaries of life, which gives the 
power to save. 

§ 2. The habit of distinctly realizing the future and 

providing for it has developed itself slowly and 

ofthe habit of fitfully in the course of man's history. Travel- 

SiTfiftur!/"' ^^^« ^^^^ ^s of tribes who might double their 
resources and enjoyments without increasing their 
total labour, if they would only apply a little in advance the 
means that lie within their power and their knowledge ; as, 
for instance, by fencing in their little plots of vegetables 
against the intrusion of wild animals. 





But even this apathy is perhaps less strange than the 
wastefulness that is found now among some classes in our 
own country. Cases are not rare of men who alternate be- 
tween earning two or three pounds a week and being reduced 
to the verge of starvation : the utility of a shilling to them 
when they are in employment is less than that of a penny 
when they are out of it, and yet they never attempt to make 
provision for the time of need. At the opposite extreme 
there are misers, in some of whom the passion for saving 
borders on insanity; while, even among peasant proprietors 
and some other classes, we meet not unfrequently with people 
who carry thrift so far as to stint themselves of necessaries, 
and to impair their power of future work. Thus they lose 
every way: they never really enjoy life; while the income 
which their stored-up wealth brings them is less than they 
would have got from the increase of their earning power, if 
they had invested in themselves the wealth that they have 
accumulated in a material form. 

In India, and to a less extent in Ireland, we find people 
who do indeed abstain from immediate enjoyment and save 
up considerable sums with great self-sacrifice, but spend all 
their savings in lavish festivities at funerals and marriages. 
They make intermittent provision for the near future, but 
scarcely any permanent provision for the distant future : the 
great engineering works by which their productive resources 
have been so much increased, have been made chiefly with the 
capital of the much less self-denying race of Englishmen. 

Thus the causes which control the accumulation of wealth 
differ widely in different countries and different ages. They 
are not quite the same among any two races, and perhaps not 
even among any two social classes in the same race. They 
depend much on social and religious sanctions; and it is 
remarkable how, when the binding force of custom has been 
in any degree loosened, differences of personal character will 
cause neighbours brought up under like conditions to differ 
from one another more widely and more frequently in their 









habits of extravagance or thrift than in almost any other 

§ 3. The thriftlessness of early times was in a great mea- 
Security as a ^^^^ ^^® *^ *^® Want of Security that those who 
condition of made provision for the future would enjoy it: 
only those, who were already wealthy, were strong 
enough to hold what they had saved ; the laborious and self- 
denying peasant who had heaped up a little store of wealth 
only to see it taken from him by a stronger hand, was a 
constant warning to his neighbours to enjoy their pleasure 
and their rest when they could. The border country between 
England and Scotland made little progress so long as it was 
liable to incessant forays ; there was very little saving by the 
French peasants in the last century when they could escape 
the plunder of the tax-gatherer only by appearing to be poor, 
or by Irish cottiers, who, on many estates, even a generation 
ago, were compelled to follow the same course in order to 
avoid the landlords' claims of exorbitant rents. 

Insecurity of this kind has nearly passed away from the 
civilized world. But we are still suffering in England from 
the effects of the Poor-law which ruled at the bednninff of 
the century, and which introduced a new form of insecurity 
for the working classes. For it arranged that part of their 
wages should, in effect, be given in the fonn of poor relief ; 
and that this should be distributed among them in inverse 
proportion to their industry and thrift and forethought, so 
that many thought it foolish to make provision for the future. 
The traditions and instincts, which were fostered by that evil 
experience, are even now a great hindrance to the pi-ogress of 
the working classes; and the principle which nominally at 
least underlies the present Poor-law, that the State should 
take account only of destitution and not at all of merit, acts 
in the same direction though with less force. 

Insecurity of this kind also is being diminished: the 
growth of enlightened views as to the duties of the State and 
of private persons towards the poor, is tending to make it 



every day more true that those who have helped themselves, 
and endeavoured to provide for their own future, will be cared 
for by society better than the idle and the thoughtless. But 
the progress in this direction remains slow, and there is much 
to be done yet. 

Again, modern methods of business have brought with 
them opportunities for the safe investment of capital in such 
ways as to yield a revenue to persons who have no good 
opportunity of engaging in any business, — not even in that 
of agriculture, where the land will under some conditions act 
as a trustworthy savings-bank \ These new opportunities have 
induced some people who would not otherwise have attempted 
it to put by something for their own old age. And, what 
has had a still greater effect on the growth of wealth, it has 
rendered it far easier for a man to provide a secure income 
for his wife and children after his death : for, after all, family 
affection is the main motive of savins:. 

§ 4. That men labour and save chiefly for the sake of 
their families and not for themselves, is shown 
by the fact that they seldom spend, after they tTve of 'favTng 
have retired from work, more than the income »s family affec- 
that comes in from their savings, preferring to 
leave their stored-up wealth intact for their families; while 
in this country alone twenty millions a year are saved in the 
form of insurance policies and are available only after the 
death of those who save them. 

A man can have no stronger stimulus to energy and enter- 
prise than the hope of rising in life, and leaving his family to 
start from a higher round of the social ladder than that on 
which he began. It may even give him an overmastering 
passion which reduces to insignificance the desire for ease, 
and for all ordinary pleasures, and sometimes even destroys in 
him the finer sensibilities and nobler aspirations. But, as is 
shown by the marvellous growth of wealth in America during 

1 Other influences exerted by nioderu methods of business on the growth 
of wealth are noticed in Frinciplen VI. vn. 5. 



the present generation, it makes him a mighty producer and 
accumulator of riches; unless indeed he is in too great a hurry 
to grasp the social position which his wealth will give him 
For his ambition may then lead him into as great extrava^ 
gance as could have been induced by an improvident and self- 
indulgent temperament. 

The greatest savings are made by those who have been 
brought up on narrow means to stern hard work, who have 
retamed their simple habits, in spite of success in business 
and who nourish a contempt for showy expenditure and a 
desire to be found at their death richer than they had been 
thought to be. This type of character is frequent in the 
quieter parts of old but vigorous countries, and it was very 
common among the middle classes in the rural districts of 
England for more than a generation after the pressure of the 
great French war and the heavy taxes that lingered in its 

§ 5. Next, as to the sources of accumulation. The power 
The source of *"" ^^""^ depends on an excess of income over ne- 
accumuiation cessary expenditure ; and this is greatest among 
iome'?' Profits. *^^ wealthy. In this country, most of the larger 
incomes, but only a few of the smaller, are chiefly 
derived from capital. And, eariy in the present century, the 
commercial classes in England had much more saving habits 
than either the country gentlemen or the working classes. 
These causes combined to make English economists of the last 
generation regard savings 'as made almost exclusively from" 
the profits of capital. 

• But even in modern England rent and the earnings of 
professional men and of hired workers are an important source 
Rent and earn- of accumulation: and they have been the chief 
'"^^- source of it in all the eariier stages of civiliza- 

tion. Moreover the middle, and especially the professional 
classes, have always denied themselves much in order to invest 
capital in the education of their children ; while a great part 
of the wages of the working classes is invested in the physical 




health and strength of their children. The older economists 
took too little account of the fact that human faculties are as 
important a means of production as any other kind of capital ; 
and we may conclude, in opposition to them, that any change 
in the distribution of wealth which gives more to the wage 
receivers and less to the capitalists is likely, other things being 
equal, to hasten the increase of material production, and that 
it will not perceptibly retard the storing-up of material wealth. 
Of course other things would not be equal, if the change were 
brought about by violent methods which gave a shock to 
public security. But a slight and temporary check to the 
accumulation of material wealth need not necessarily be an 
evil, even from a purely economic point of view, if, being 
made quietly and without disturbance, it provides better 
opportunities for the great mass of the people, increases their 
efficiency, and developes in them such habits of self-respect 
as to result in the growth of a much more efficient race of 
producers in the next generation. For then it may do more 
in the long-run to promote the growth of even material wealth 
than great additions to our stock of factories and steam- 

A people among whom wealth is well distributed, and who 
have high ambitions, are likely to accumulate a ^ . ,. 

, . •' Public accu- 

great deal of public property ; and the savings muiations of 
made in this form alone by some well-to-do demo- **^'"°'=^*<='««- 
cracies form no inconsiderable part of the best possessions 
which our own age has inherited from its predecessors. • The 
growth of the co-operative movement in all its many fomis, 
of building societies, friendly societies, trades unions, of 
working men's savings-banks &c., shows that, even 
so far as the immediate accumulation of material 
wealth goes, the resources of the country are not, as the older 
economists assumed, entirely lost when they are spent in 
paying wages'. 

1 It must howevfi* be admitted that what passes by the name of public 
property is often only nothing more than private wealth boiTowed on a mort- 






s 6. 

S o. The sacrifice of present pleasure for the sake of 
Interest is the ^^*^"^®> ^^^ been Called abstinence by economists, 
reward of wait- But this term has been misunderstood: for the 
greatest accumulators of wealth are very rich 
persons, some of whom live in luxury, and certainly do not 
practise abstinence in that sense of the term in which it is 
convertible with abstemiousness. What economists meant was 
that, when a person abstained from consuming anything which 
he had the power of consuming, with the purpose of increasing 
his resources in the future, his abstinence from that particular 
act of consumption increased the accumulation of wealth. 
Since, however, the term is liable to be misunderstood, it 
is better to say that the accumulation of wealth is generally 
the result of a postponement of enjoyment, or of a waitina 
for it'. 

This willingness to wait is generally increased by a rise in 
the rate of interest which is the reward of waiting. Con- 
versely a fall in the rate of interest generally lowers the 
Influence of ^^^'^^ at which a person finds it just not worth 
changes in the while to give up present pleasures for the sake of 
on sa°Jing""* *^^^® ^"^^'"^ pleasures that are to be secured by 
saving some of his means. It will therefore gene- 
rally cause people to consume a little more now, and to make 
less provision for future enjoyment. But this mle is not 
without exception. 

For indeed Sir Josiah Child remarked two centuries ago, 
that in countries in which the rate of interest is high, mer- ' 
chants " when they have gotten great wealth, leave tra!ding" 
and lend out their money at interest, " the gain thereof being 
so easy, certain and great ; whereas in other countries where 
interest is at a lower rate, they continue merchants from gene- 
mtion to generation, and enrich themselves and the state." 

gage of future public revenues. Municipal gas-works for instance are not 
generally the results of public accumulations. They were built with wealth 
saved by private persons, and borrowed on public account. 

7, ■ ^ ;'""Sf '■ ^^''^^ ""^ "'^ "^^'^^ o* sacrifice involved in waiting is made in 
rrtuciidts IV. VIII. 8, 9. 





And it is as true now, as it was then, that many men retire 

from business when they are yet almost in the prime of life, 

and when their knowledge of men and things might enable 

them to conduct their business more efficiently than ever. 

Again, as Mr Sargant has pointed out, if a man has decided 

to go on working and saving till he has provided a certain 

income for his old age, or for his family after his death, he 

will find that he has to save more if the rate of interest is low 

than if it is high. Suppose, for instance, that he wishes to 

provide an income of £400 a year on which he may retire 

from business, or to insure £400 a year for his wife and 

children after his death : if then the current rate of interest is 

5 per cent., he need only put by £8,000 or insure his life for 

£8,000; but if it is 4 per cent., he must save £10,000 or 

insure his life for £10,000. 

It is then possible that a continued fall in the rate of 
interest may be accompanied by a continued increase in the 
yearly additions to the world's capital. But none the less is 
It true that a fall in the distant benefits to be got by a given 
amount of working and Avaiting for the future does tend on 
the whole to diminish the provision which people make for 
the future; or in more modern phrase, that a fall in the rate 
of interest tends to check the accumulation of wealth. For 
though with man's growing command over the resources of 
nature, he may continue to save much even with a low rate of 
interest ; yet, Vhile human nature remains as it is, eveiy fall 
in that rate is likely to cause many more people to save less 
than to save more than they would otherwise have done. 

To sum up :— The accumulation of wealth is governed by 
a great variety of causes : by custom, by habits of self-control 
and realizing the future, and above all by the power of family 
aflfection. Security is a necessary condition for it, and the pro- 
gress of knowledge and intelligence furthers it in many ways. 
A rise in the rate of interest, or demand price for saving, 
tends to increase the volume of saving. Fur in spite of the 
fact that a few people who have determined to secure an 





BOOK IV. CU. VII. § 6. 

income of a certain fixed amount for themselves or their 
family will save less with a high rate of interest than with a 
low rate, it is a nearly universal rule that a rise in the rate 
increases the desire to save ; and it often increases the power 
to save, or rather it is often an indication of an increased 
efficiency of our productive resources. 

It must however be recollected that the annual investment 
of wealth is a small part of the already existing stock, and 
that therefore the stock would not be increased perceptibly in 
any one year by even a considerable increase in the annual 
rate of savins:'. 

1 Tlie followiug table is compiled chiefly from data collected by Mr Giffen. 

Country and 
Author of 

£ million. 


£ million. 

£ million. 

' other 
£ million. 



£ million. 

per cap. 



1690 (Gregory King) 
1812 (Colquhoun) . 
1885 (Giffen) . . . 













United Kingdom. 

1812 (Colqulioun) . 
1865 (Giffen) . . . 
1875 (Giffen) . . . 
1885 (Giffen) . . . 










United States. 

1880 (Census) . . 








2,440 * 

1878 (de Foville) . 





215 ' 


1884 (Pantaleoni) . 







The series of bad harvests and the diflficulty of importing food during the 
great war at the beginning of this century impoverished the people of England, 
but nearly doubled the nominal value of the land of England. Since then free 
trade, the improvements in transport, the opeimig of new countries and other 
causes have lowered the nominal value of that part of the land v;hich is 
devoted to agriculture, but have added much to the real wealth of the people. . 






§ 1. Writers on social science from the time of Plato 
downwards have delighted to dwell on the in- 
creased efficiency which labour derives from or- 1^\ '^°"*!'"" 
gamzation. Adam Smith gave a vivid descrip- """ increases 
tion of the advantages of the division of labour; l^rZ'b^. 
he pointed out how they render it possible for '°'°'- 
increased numbers to live in comfort ou a limited territory ■ 
and he argued that the pressure of population on the means of 
subsistence tends to weed out those mces who through want 
of organization or for any other cause are unable to turn to 
the best account the advantages of the place in which they 
ive. Before two more generations had elapsed Malthus' his- 
torical account of man's struggle for existence set Darwin 
thinking as to the effects of the struggle for existence in the 
animal world Since that time biology has more than repaid 
her debt; and economists have learnt much from the profound 
analogies which have been discovered between industrial or- 
^nization on the one side and the physical organization of 
the higher anmials on the other. The development of the 
organism whether social or physical, involves a greater sub- 
division of functions between its sepai^te parts on the one 
hand, and on the other a more intimate connection between 
them Each part gets to be less and less self-sufficient, to 
depend for its well-being more and more on other parts so 
that no change can take place in any part of a highly- 
developed organism without affecting others also 

This increased subdivision of functions, or "differentia 


BOOK IV. CH. Vlll. §^ 1, 2. 

tioii" as it is called, manifests itself with regard to industry 

Differentiation ^"^ ^^^^ ^^^"^^ ^« *^^« division of labour, and the 

and Integra- development of specialized skill, knowledge and 

machinery: while "integration," that is, a 

growing intimacy and firmness of the connections between the 

separate parts of the industrial organism, shows itself in such 

forms as the increase of security of commercial credit, and of 

the means and habits of communication by sea and road, by 

railway and telegraph, by post and printing-press. This leads 

us to consider the main bearings in economics of the law that 

the struggle for existence causes those organisms to multiply 

which are best fitted to derive benefit from their environment. 

This law is often misunderstood ; and taken to mean that 

The law of ^^^^^ organisms tend to survive which are best 

sui^fvi!/°'" -^^^"^ ^"^ ^.^'^J'^ *^^ environment. But this is not 
its meaning. It states that those organisms tend 
to survive which are hest fitted to utilize the environment for 
their own purposes. Now those that utilize the environment 
most, may turn out to be those that benefit it most. But it 
must not be assumed in any particular case that they are 
thus beneficial, without special study of that case. 

§ 2. Adam Smith was aware that competition did not 
always cause the survival of those businesses and 
those methods of business which were most ad- 
vantageous to society ; and though he insisted on 
the general advantages of that minute division 
of labour and of that subtle industrial organi- 
zation which were being developed with unexampled rapidity 
in his time, yet he was careful to indicate points in which 
the system failed, and incidental evils which it involved. 
But many of his followers were less careful. They were not 
contented with arguing that the new industrial organization 
was obtaining victories over its rivals in every direction, 
and that this very fact proved that it met a want of the 

and discords 
between indi- 
vidual and col 
lective inter- 



times, and had a good balance of advantages over disad- 
vantages : but they went further and applied the same argu- 
ment to all its details; they did not see that the very 
strength of the system as a whole enabled it to carry along 
with it many incidents which were in themselves evil. For 
a while they fascinated the world by their romantic accounts 
of the flawless proportions of that "natural" organization 
of industry which had grown from the rudimentary germ 
of self-interest. They depicted each man selecting his daily 
work with the sole view of getting for it the best pay 
he could, but with the inevitable result of choosing that in 
which he could be of most service to others. They argued 
for instance that, if a man had a talent for managing business, 
he would be surely led to use that talent for the benefit of 
mankind : that meanwhile a like pursuit of their own interests 
would lead others to provide for his use such capital as he 
could turn to best account ; and that his own interest would 
lead him so to arrange those in his employment that every- 
one should do the highest work of which he was capable, and 
no other. 

This "natural organization of industry" had a fascination 
for earnest and thoughtful minds; it prevented them fix)m 
seeing and removing the evil that was intertwined with the 
good in the changes that were going on around them ; and it 
hindered them from inquiring whether many even of the 
broader features of modern industry may not be transitional, 
having indeed good work to do in their time, as the caste 
system had in its time : but like it chiefly serviceable in lead- 
ing the way towards better arrangements for a happier age\ 

1 Physical peculiarities acquired by parents during their life-time are 
seldom, if ever, transmitted. But the children of those who lead healthy lives 
physically and morally are perhaps born with a firmer fibre than others, and 
certainly are more likely to be well nouiished, well trained, to acquire whole- 
some instincts, and to have that self-respect which is a mainspring of progress. 





§ 1. The first condition of an efficient organization of 
Plan of this ^^dustry is that it should keep everyone em- 

?o"nowtr° ^iT"^ ^* '"'^ ^^'^ ^' ^'' ^^^^'^' ^'^d training 
chapters. ^^ '^^^ *<> do well, and should equip him with 

wort W ?'^„^^'\"'^"^^'^^^ ^^^ ^ther appliances for his 
work. We shall confine ourselves to the division of labour 
between different classes of operatives, with special reference 
to the influence of machinery. In the following chapter we 
shall consider the reciprocal effects of division of labour and 
localization of industry; in a third chapter we shall inquire 
how far the advantages of division of labour depend upon the 
aggregation of large capitals into the hands of single indi 
viduals or firms, or, as is commonly said, on production on a 
large scale ; and lastly, we shall examine the growing speciali 
zation of the work of business management ^ 

Everyone is familiar with the fact that "practice makes 

P ^-t. first seemed difficult, to be done after a time 
with comparatively little exertion, and yet much better than 
betore ; and physiology in some measure explains this fact 

Adam Smith pointed out that a lad who had made nothincr 
Illustrations. ^""^ ^^^^" ^^^ ^'^ ^^^^ could make them twice as 
quickly as a firstrate smith who only took to nail 
making occasionally. Anyone who has to perform exactly 


the same set of operations day after day on things of exactly 
the same shape, gradually learns to move his fingei-s exactly 
as they are wanted, by almost automatic action and with 
greater rapidity than would be possible if eveiy movement 
had to wait for a deliberate instruction of the will. One 
familiar instance is seen in the tying of threads by children in 
a cotton mill. Again, in a clothing or a boot factory, a person 
who sews, whether by hand or machinery, just the same seam 
on a piece of leather or cloth of just the same size, hour after 
hour, day after day, is able to do it with far less effort and far 
more quickly than a worker with much greater 'quickness of 
eye and hand, and of a much higher order of general skill, 
who was accustomed to make the whole of a coat or the whole 
of a boot. 

Again, in the wood and the metal industries, if a man 
has to perform exactly the same operations over and over 
again on the same piece of material, he gets into the habit of 
holding it exactly in the way in which it is wanted, and of 
arranging the tools and other things which he has to handle 
in such positions that he is able to bring them to work on 
one another with the least possible loss of time and of force in 
the movements of his own body. Accustomed to find them 
always in the same position and to take them in the same 
order, his hands work in harmony with one another almost 
automatically : and, as he becomes more practised, his expen- 
diture of nervous force diminishes even more rapidly than his 
expenditure of muscular force. 

But when the action has thus been reduced to routine, it 
has nearly arrived at the stage at which it can 
be taken over by machinery. The chief difficulty rf^man"^^"^^ 
to be overcome is that of getting the machinery ^o"*" and of 
to hold the material firmly in exactly the position "^^"^^""'^• 
in which the machine tool can be brought to bear on it in the 
right way, and without wasting too much time in taking grip 
of it. But this can generally be contrived when it is worth 





while to spend some labour and expenso on it ; and then the 
whole operation can often be controlled by a worker who, 
sitting before a machine, takes with the left hand a piece of 
wood or metal from a heap and puts it in a socket, while with 
the right he draws down a lever, or in some other way sets 
the machine tool at work, and finally with his left hand 
throws on to another heap the material which has been cut or 
punched or drilled or planed exactly after a given pattern. 
Thus machinery constantly supplants that purely manual skill, 
the attainment of which was, even up to Adam Smith's time, 
the chief advantage of division of labour. But, at the same 
time, it increases the scale of manufactures and makes them 
more complex ; and, on the whole, increases the opportunities 
for division of labour of all kinds, and especially in the matter 
of business management. 

§ 2. The powers of machinery to do work that requires 
too much accuracy to be done by hand are perhaps best seen 
Interchange- ^^ some branches of the metal industries in which 
able Parts. \^y^q System of Interchangeable Parts is being 
rapidly developed. It is only after long training and with 
much care and labour that the hand can make one piece of 
metal accurately to resemble or to fit into another : and after 
all the accuracy is not perfect. But this is just the work 
which a well made machine can do most easily and most per- 
fectly. For instance, if sowing and reaping machines had to 
be made by hand, their first cost would be very high; and 
when any part of them was broken, it could be replaced only 
at great cost by sending the machine back to the manufacturer 
or by bringing a highly skilled mechanic to the machine. But 
as it is, the manufacturer keeps in store many facsimiles of 
the broken part, which were made by the same machinery, 
and are therefore interchangeable with it. A farmer in the 
North- West of America, perhaps a hundred miles away from 
any good mechanic's shop, can yet use complicated machinery 
with confidence; since he knows that by telegraphing the 


number of the machine and the number of any part of it 
which he has broken, he will get by the next train a new 
piece which he can himself fit into its place. The importance 
of this principle of interchangeable parts has been but re- 
cently grasped; there are however many signs that it will 
do more than any other to extend the use of machine-made 
machinery to every branch of production, including even 
domestic and agricultural work. 

The influences which machinery exerts over the character 
of modern . industry are well illustrated in the The watch- 
manufacture of watches. A few years ago the making trade, 
chief seat of this business was in French Switzerland ; where 
the subdivision of labour was carried far, though a great part 
of the work was done by a more or less scattered population. 
There were about fifty distinct branches of trade, each of 
which did one small part of the work. In almost all of them 
a highly specialized manual skill was required, but veiy little 
juclgment ; the earnings were generally low, because the trade 
had been established too long for those in it to have anything, 
like a monopoly, and there was no difficulty in bringing up 
to It any child with ordinary intelligence. But this industry 
IS now yielding ground to the American system of makino- 
watches by machinery, which requires very little specialized 
manual skill. In fact the machinery is becoming every year 
more and more automatic, and is getting to require less and ■ 
less assistance from the human hand. But the more delicate 
the machine's power, the greater is the judgment „ ^ 
and carefulness which is called for from those cre"ses"t\^ de-" 
who see after it. Take for instance a beautiful r^rlSuP"'" 
machine which feeds itself with steelwire at one e«""; 
end, and delivers at the other tiny screws of exquisite form • 
It displaces a great many operatives who had indeed acquired 
a very high and specialized manual skill, but who lived 
sedentary lives, straining their eyesight through microscopes, 
and finding in their work very little scope for any faculty 




except a mere command over the use of their fingers. But 
the machine is intricate and costly, and the person who minds 
it must have an intelligence, and an energetic sense of respon- 
sibility, which go a long way towards making a fine character; 
and which, though more common than they were, are yet 
sufficiently rare to be able to earn a very high rate of pay. 
No doubt this is an extreme case ; and the greater part of the 
work done in a watch factory is much simpler. But much 
of it requires higher faculties than the old system did, and 
those engaged in it earn on the average higher wages ; at the 
same time that it has already brought the price of a trust- 
worthy watch within the range of the poorest classes of the 
community, and it is showing signs of being able soon to ac- 
complish the very highest class of work. 

Those who finish and put together the different parts of a 
watch must always have highly specialized skill : 
barriers be- out most of the machines which are in use in a 
tTdes.''''^"*"' ^^^""^ factory, are not different in general cha- 
racter from those which are used in any other of 
the lighter metal trades: in fact many of them are mere 
modifications of the turning lathes and of the slotting, punch- 
ing, drilling, planing, shaping, milling machines and a few 
others, which are familiar to all engineering trades. This is a 
good illustration of the fact that while there is a constantly 
increasing subdivision of labour, many of the lines of division 
between trades which are nominally distinct are becoming 
narrower and less difficult to be passed. In old times it would 
have been very small comfort to watch-makers, who happened 
to be suffering from a diminished demand for their wares, 
to be told that the gun-making trade was in want of extra 
hands ; but most of the operatives in a watch factory would 
find machines very similar to those with which they were 
familiar, if they sti-ayed into a gun-making factory or sewing- 
machine factory, or a factory for making textile machinery. 
A watch factory with those who worked in it could be con- 



verted without any overwhelming loss into a sewing-machine 
factory: almost the only condition would be that no one 
should be put to work in the new factory which required a 
higher order of general intelligence, than that to which he 
was already accustomed'. 

§ 3. We may now pass to consider the effects which 
machinery has in relieving that excessive mus- 
cular strain which a few generations ago was the ,^*"=^^"f ^^ ^e- 

, „ ° t) ""^ ^"^ lieves the 

common lot of more than half the workincr men strain on hu- 
even in such a country as England. The'' most "^"" "^"^^^"• 
marvellous instances of the power of machinery are seen in 
large iron-works, and especially in those for making armour 
plates, where the force to be exerted is so great that man's 
muscles count for nothing, and where every movement, whe- 
ther horizontal or vertical, has to be effected by hydraulic or 
steam force; man merely standing by ready to govern the ma- 
chinery and clear away ashes or perform some such secondary 

Machinery of this class has increased our command over 
nature, but it has not directly altered the character of man's 
work very much; for that which it does he could not have 
done without it. But in other trades machinery has lightened 
man s labours. The house-carpenters, for instance, make things 
ot the same kind as those used by our forefathers, with much 
less toil for themselves. They now give themselves chiefly to 
those parts of the task which are most pleasant and most 
interesting; while in every country town and almost every 
village there are found steam mills for sawing, planing and 
moulding, which relieve them of that grievous fatigue which 
not very long ago used to make them prematurely old^ 

in wa^rh In^n?-^^' '"m^^^ '^'*^^^^' ""^ P"^*^"^ ^^^ ^l°^««t ^s instructive as those 
^tch-making. Tliey are traced in Pnnciples IV. ix. 5. 

purposes wlJ f"^' """f ^""^ '"*^"^^ '"^"^^^ ^^'^^ ^^''^' ^«^' ^^ors and other 
ere comn!n w ^«^«^^»^°^y «f ^^^ carpenter. AU but speciaUy skiUed men 

hrbroX , Tf " ^'^^ P"^^ «^ *^^i^ ^^«^« ^tJ^ the jack-pla^e Td 
this biought on heart-disease, making them as u rule old men by the toe they 

io— 2 



New machinery, when just invented, generally requires a 
fijreat deal of care and attention. But the work 


takes over mo- of its attendant is always being sifted ; that 
notonouswork ^j^^j^ jj. uniform and monotonous is gradually 

taken over by the machine, which thus becomes steadily more 
and more automatic and self-acting j till at last there is no- 
thing for the hand to do, but to supply the material at certain 
intervals and to take away the work when finished. There 
still remains the responsibility for seeing that the machinery 
is in good order and working smoothly ; but even this task is 
often made light by the introduction of an automatic move- 
ment, which brings the machine to a stop the instant anything 
goes wrong. 

Nothing could be more narrow or monotonous than the 
occupation of a weaver of plain stuffs in the old time. But 
now one woman will manage four or more looms, each of 
which does many times as much work in the course of the 
day as the old hand-loom did; and her work is much less 
monotonous and calls for much more judgment than his did. 
So that for every hundred yards of cloth that are woven, the 
purely monotonous work done by human beings is probably 
not a twentieth part of what it was. 

As Roscher says, it is monotony of life much more than 

J , monotony of work that is to be dreaded : mono- 

ana lessens •' 

monotony of tony of work is an evil of the first order only 
when it involves monotony of life. Now when a 


were forty. But now those who become i^rematurely old through overwork 
are to be found almost exclusively among the professional classes, among 
those engaged in the more anxious kinds of business, and in some agricultural 
districts in which the rate of wages is still very low and the people are habitu- 
ally underfed. Adam Smith tells us that "workmen, when they are liberally 
paid, are very apt to overwork themselves and to ruin their health and consti- 
tution in a few years. A carpenter hi London, and in some other places, is 
not supposed to last in his utmost vigour above eight years.... Almost every 
class of artificers is subject to some particular infirmity occasioned by exces- 
sive application to their peculiar species of work." Wealth of Nations, Book i. 
Chapter vu. 



person's employment requires much physical exertion, he is fit 
for nothing after his work ; and unless his mental faculties 
are called forth in his work, they have little chance of being 
developed at all. But the nervous force is not very much 
exhausted in the ordinary work of a factory, at all events 
where there is not excessive noise, and where the hours of 
labour are not too long. The social surroundings of factory 
life stimulate mental activity in and out of working hours; 
and even those factory workers, whose occupations are seem- 
ingly the most monotonous, have more intelligence and mental 
resource than has been shown by the English agricultural 
labourer, whose employment has more variety. It is true 
that the American agriculturist is an able man, and that his 
children rise rapidly in the world. But partly because land 
has been plentiful, and he has generally owned the farm that 
he cultivates, he has had better social conditions than the 
English ; he has always had to think for himself, and has long 
had to use and to repair complex machines. The English 
agricultural labourer has had many great disadvantages to 
contend with ; but is steadily improving his position. 

§ 4. We may next consider what are the conditions under 
which the economies in production arising from 
division of labour can best be secured. It is fSandma" 
obvious that the efficiency of specialized machi- chinery cannot 
nery or specialized skill is but one condition of unie'Ls'thescate 
its economic use; the other is that sufficient work ?^ Production 

IS large. 

should be found to keep it well employed. As 
Babbage pointed out, in a large factory "the master manu- 
facturer by dividing the work to be executed into different 
processes, each requiring different degrees of skill or force, 
can purchase exactly that precise quantity of both which is 
necessary for each process ; whereas if the whole work were 
executed by one workman that person must possess sufficient 
skill to perform the most difficult and sufficient strength to 
execute the most laborious of the operations into which the 


BOOK IV. CH. IX. 5 4. 

work is divided." The economy of production requires not 
only that each person should be employed constantly in a 
narrow range of work, but also that, when it is necessary for 
him to undertake different tasks, each of these tasks should 
be such as to call forth as much as possible of his skill and 
ability. Just in the same way the economy of machinery 
requires that a powerful turning-lathe when specially arranged 
for one class of work should be kept employed as long as 
possible on that work ; and if after all it is necessary to 
employ it on other work, that should be such as to be worthy 
of the lathe, and not such as could have been done equally 
well by a much smaller machine. 

Many of those economies in the use of specialized skill and 
machinery which are commonly regarded as within the reach 
of very large establishments, do not depend on the size of indi- 
vidual factories. Some depend on the aggregate production of 
the kind in the neighbourhood ; while others again, especially 
those connected with the growth of knowledge and tho pro- 
gress of the arts, depend chiefly on the aggregate volume of 
production in the whole civilized world. And here we may 
introduce two technical terms. We may divide the economies 
arising from an increase in the scale of production of any kind 
of goods, into two classes. Those which we have 
been discussing may be called Internal Economies; 
because they are dependent on the resources of 
the individual houses of business engaged in it, on their 
internal organization and on the efficiency of their manage- 
ment. We have next to examine those Uocternal economies 
which arise from the general development of an industry and 
especially from the concentration of many businesses of a 
similar character in particular localities : or, as is commonly 
said, from the Localization of Industry. 

External and 
Internal Eco- 






§ 1. In an early stage of civilization every place had to 
depend on its own resources for most of the 
heavy wares which it consumed; unless indeed forms of locai- 
it happened to have special facilities for water ^^f** indus- 
carriage. But the slowness with which customs 
changed, made it easy for producers to meet the wants of 
consumers with whom they had little communication ; and it 
enabled comparatively poor people to buy a few expensive 
goods from a distance, in the security that they would add to 
the pleasure of festivals and holidays during a life-time, or 
perhaps even during two or three life-times. Consequently 
the lighter and more expensive articles of dress and personal 
adornment, together with spices and some kinds of metal 
implements used by all classes, and many other things for the 
special use of the rich, often came from astonishing distances. 

Many various causes have led to the localization of indus- 
tries, but the chief have been physical ; such as 
the character of the climate and the soil, or the origins of 
existence of mines and quarries in the neigh- ^^^^^^^^^ *"' 
bourhood, or within easy access by land or water. 
Thus metallic industries have generally been either near mines 
or in places where fuel was cheap. The iron industries in 
England first sought those districts in which charcoal was 
plentiful, and afterwards they went to the neighbourhood of 


BOOK IV. CH. X. §§ 1, 2. 

collieries. Staffordshire makes many kinds of pottery, all the 
materials of which are imported from a long distance; but 
she has cheap coal and excellent clay for making the heavy 
"seggars" or boxes in which the pottery is placed wliile being 
fired. Straw plaiting has its chief home in Bedfordshire, 
where straw has just the right proportion of silex to give 
strength without brittleness; and Buckinghamshire beeches 
have afforded the material for the Wycombe chairmaking. 
The Sheffield cutlery trade is due chiefly to the excellent grit 
of which its grindstones are made. 

Another chief cause has been the patronage of a court. 
The rich folk there assembled make a demand for jroods of 
specially high quality; and this attracts skilled workmen from 
a distance, and educates those on the spot. Thus the mecha- 
nical faculty of Lancashire is said to be due to the influence 
of Norman smiths who were settled at Warrington by Hugo 
de Lupus in William the Conqueror's time. And the greater 
part of England's manufacturing industry before the era of 
cotton and steam had its course directed by settlements of 
Flemish and Huguenot artisans; many of which were made 
under the immediate direction of Plantagenet and Tudor 
kings. These immigrants taught us how to weave woollen 
and worsted stuffs, though for a long time we sent our cloths 
to the Netherlands to be fulled and dyed. They taught us 
how to cure herrings, how to manufacture silk, how to make 
lace, glass, and paper, and to provide for many other of our 

§ 2. When an industry has once thus chosen a locality 

for itself, it is likely to stay there lonff : so great 
Advantages of ,i i i • i , « 

localized in- are the advantages which people following the 

redVta^'skmV ^^^^ skilled trade get from near neighbourhood 
to one another. The mysteries of the trade be- 
come no mysteries ; but are as it were in the air, and children 
learn many of them unconsciously. Good work is rightly 
appreciated; inventions and improvements in machinery, in 






processes and the general organization of the business have 
their merits promptly discussed ; if one man starts a new idea 
it is taken up by others and combined with suggestions of 
their own, and thus becomes the source of further new ideas. 
And presently subsidiary trades grow up in the subsidiary 
neighbourhood, supplying it with implements and trades; 
materials, organizing its traftic, and in many ways (Conducing 
to the economy of its material. 

Again, the economic use of expensive machinery can some- 
times be attained in a very high degree in a specialized 
district in which there is a large aggregate pro- "machinery; 
duction of the same kind, even though no individual capital 
employed in the trade be very large. For subsidiary indus- 
tries devoting themselves each to one small branch of the 
process of production, and working it for a great many of 
their neighbours, are able to keep in constant use machinery 
of the most highly specialized character ; and to make it pay 
its expenses, though its original cost may have been high, and 
its rate of depreciation very rapid. 

Again, in all but the earliest stages of economic develop- 
ment a localized industry gains a great advantage jocai market 
from the fact that it offers a constant market for ^°*" ^'^^"• 
skill. Employers are apt to resort to any place where they 
are likely to find a good choice of workers with the special 
skill which they require; while men seeking employment 
naturally go to places where they expect to find a good market 
for their skill, in consequence of the presence of many em- 
ployers who require its aid. The owner of an isolated factory 
is often put to great shifts for want of some special skilled 
labour which has suddenly run short ; and a skilled workman, 
when thrown out of employment in it, has no easy refuge. 

On the other hand a localized industry has some disad- 
vantages as a market for labour if the work done in it is 
chiefly of one kind, such for instance as can be done only by 
strong men. In those iron districts in which there are no 


BOOK IV. CH. X. § 2. 

textile or other factories to give employment to women and 
But there may children, wages are high and the cost of labour 
be too exten- clear to the employer, while the average money 
fircone kind"of earnings of each family are low. But the remedy 
labour. f^j. ^jjjg gy^j jg obvious, and is found in the growth 

in the same neighbourhood of industries of a supplementary 
character. Thus textile industries are constantly found con- 
gregated in the neighbourhood of mining and engineering 
industries, in some cases having been attracted by almost 
imperceptible steps; in others, as for instance at Barrow, 
having been started deliberately on a large scale in order to 
give variety of employment in a place where previously there 
had been but little demand for the work of women and 

The advantages of variety of employment are combined 
with those of localized industries in some of our manufacturing 
towns, and this is a chief cause of their continued growth. 
But on the other hand the value which the central sites of a 
large town have for trading purposes, enables them to com- 
mand much higher ground-rents than the situations are worth 
for factories, even when account is taken of this combination 
of advantages : and there is a similar competition for dwelling 
space between the employes of the trading houses, and the 
factory workers. The result is that factories now congregate 
in the outskirts of large towns and in manufacturing districts 
in their neighbourhood rather than in the towns themselves. 

A district which is dependent chiefly on one industry is 
liable to extreme depression, in case of a falling- 
Different in- qQ -j^ ^Yie demand for its produce, or of a failure 

dustnes m the ^ ' i • i • 

same neigh- in the Supply of the raw material which it uses, 
miti'gate each This evil again is in a great measure avoided by 
other's depres- ^hoge large towns, or large industrial districts in 

sions. ° 1 • 

which several distinct industnes are strongly de- 
veloped. If one of them fails for a time, the others are likely 
to support it in many ways, chiefly indirect; one of these 




being that they keep in heart the local shopkeepers, who are 
thus enabled to continue their assistance longer than they 
otherwise could, to the workpeople in those trades that happen 
to be depressed. 

It is instructive to study the influence of improved means 
of communication on the character of England's 

. - . . , J. Changes in the 

industries. The agricultural population has di- distribution of 
minished relatively to the rest, though not so fast J^"^f^^^f ^ '''' 
as is commonly supposed. Manufacture employs 
a rather smaller proportion of the population than it did a 
generation ago. But there has been a great increase in in- 
dustries in which the progress of invention has done little 
towards economizing effort, and which meet growing demands: 
the chief of these are education, domestic service, building, 
dealing, and transport by road. 






§ 1. The advantages of production on a large scale are 

best shown in manufacture ; under which head 
Manufacture • i i n i. • i • i 

is typical for we may include all businesses engaged in work- 

our present jjj„ ^p material into forms in which it will be 
purpose. ox 

adapted for sale in distant markets. The cha- 
racteristic of manufacturing industries which makes them 
offer generally the best illustrations of the advantages of pro- 
duction on a large scale, is their power of choosing freely 
the locality in which they will do their work. They are 
thus contrasted on the one hand with agriculture and other 
extractive industries (mining, quarrying, fishing etc.), the geo- 
graphical distribution of which is determined by nature ; and 
on the other hand with industries that make or repair things 
to suit the special needs of individual consumers, from whom 
they cannot be far removed, at all events without great loss. 
The chief advantages of production on a large scale are 
Economy of ©conomy of skiU, economy of machinery and eco- 
materiai. nomy of materials : but the last of these is rapidly 
losing importance relatively to the other two. It is true that 
an isolated workman often throws away a number of small 
things which would have been collected and turned to good 
account in a factory ; but waste of this kind can scarcely 
occur in a localized manufacture' even if it is in the hands of 
small men ; and there is not very much of it in any branch 





of industry in modem England, except agriculture and 
domestic cooking ^ 

But small factories are still placed under a great disadvan- 
tage, even in a localized industry, by the growing specialized 
variety and expensiveness of machinery. For in machinery. 
a large establishment there are often many expensive machines 
each made specially for one small use. Each of them requires 
space in a good light, and thus stands for something consider- 
able in the rent and general expenses of the factory; and 
independently of interest and the expense of keeping it in 
repair, a heavy allowance must be made for depreciation in 
consequence of its being probably improved upon before long. 
A small manufacturer must therefore have many things done 
by hand or by imperfect machinery, though he knows how to 
have them done better and cheaper by special machineiy, if 
only he could find constant employment for it. 

But next, a small manufacturer may not always be ac- 
quainted with the best machinery for his purpose, improvements 
It is true that if the industry in which he is in machinery, 
engaged has been long established on a large scale, his ma- 
chinery will be well up to the mark, provided he can afford to 
buy the best in the market. In agriculture and the cotton 
industries for instance, improvements in machineiy are devised 
almost exclusively by machine makers; and they are accessible 
to all, at any rate on the payment of a royalty for patent 
riarht. But this is not the case in industries that are as yet 

1 No doubt many of the most important advances of recent years have 
been due to the utilizing of what had been a waste product ; but this has been 
generally due to a distinct invention, either chemical or mechanical, the use 
of which has been indeed promoted by minute subdivision of labour, but has 
not been directly dependent on it. 

Again, it is true that when a hundred suits of furniture, or of clothing, 
have to be cut out on exactly the same pattern, it is worth while to si)end 
great care on so plamiing the cutting out of the boards or the cloth, that only 
a few small pieces are wasted. But this is properly an economy of skill; one 
planning is made to suffice for many tasks, and therefore can be done well and 



BOOK IV. CH. XI. g 1, 2. 

in an early stage of development or are rapidly changing their 
form; such as the chemical industries, the watchmaking in- 
dustry and some branches of the jute and silk manufactures ; 
and in a host of trades that are constantly springing up to 
supply some new want or to work up some new material. 

There are however some trades iii which the advantages 
which a large factory deiives from the economy of machinery 
almost vanish as soon as a moderate size has been reached. 
For instance in cotton spinning, and calico weaving, a com- 
paratively small factory will hold its own and give constant 
employment to the best known machines for every process : so 
that a large factory is only several parallel smaller factories 
under one roof; and indeed some cotton-spinners, when en- 
larging their works, think it best to add a weaving depart- 
ment. In such cases the large business gains little or no 
economy in machinery; but even then it generally saves some- 
thing in building, particularly as regards chimneys, in the 
economy of steam power, and in the management and repairs 
of engines and machinery. This last point is of rather more 
importance than appears at first sight ; and large works even 
though they produce nothing but soft goods, have generally 
well-organized carpenters' and mechanics' shops, which not 
only diminish the cost of repaii-s, but have the impoi-tant 
advantage of preventing delays from accidents to the plant. 
Akin to these last, there are a great many advantages 
Buying and whicli a large factory, or indeed a large business 
selling. ^£ almost any kind, nearly always has over a 

small one. A large business buys in groat quantities and 
therefore cheaply ; it pays low freights and saves on carriage 
in many ways, particularly if it has a railway siding. It 
often sells in large quantities, and thus saves itself trouble; 
and yet at the same time it gets a good price, because it offers 
conveniences to the customer by having a large stock from 
which he can select and at once fill up a varied order ; while 
its reputation gives him confidence. It can spend large sums 




on advertising by commercial travellers and in other ways; 
its agents give it trustworthy information on trade and per- 
sonal mattei-s in distant places, and its own goods advertise 
one another. 

Many of these economies in the matter of buying and 
selling can be secured by a large trading house. Alliance be- 
which puts out its work to be done by small tween large 
manufacturers or by workpeople at their own sma"produ- 
homes. So far therefore they do not tell in the '=^"- 
direction of destroying small manufacturers, but rather of 
limiting the character of the work of business management 
done by them; as we shall see more fully in the next chapter. 

Next, with regard to the economy of skill. Everything' 
that has been said with regard to the advantages specialized 
which a large establishment has in being able to ^^>"' 
afford highly specialized machinery applies equally with regard 
to highly specialized skill. It can contrive to keep each of 
its employes constantly engaged in the most difiicult work of 
which he is capable, and yet so to narrow the range of his 
work that he can attain the facility and excellence which 
come from long-continued practice. This economy gives a 
practical supremacy to large factories in industries which offer 
much scope for it, if the work cannot be subdivided among 
many small factories on the plan described in the last chapter. 

§ 2. The head of a large business can reserve all his 
strength for the broadest and most fundamental 
problems of his trade: he must indeed assure manuflrturer 
himself that his managers, clerks and foremen ^an give him - 

. . , . self wholly to 

are the right men for their work, and are doing broad ques- 
their work well; but beyond this he need not ^^°"^°^P°"'^y- 
trouble himself much about details. He can keep his mind 
fresh and clear for thinking out the most difficult and vital 
problems of his business; for studying the broader move- 
ments of the markets, the yet undeveloped results of current 
events at home and abroad ; and for contriving how to improve 



BOOK IV. CH. XI. § 2. 

the organization of the internal and external relations of his 

For much of this work the small employer has not the 
time if he has the ability ; he cannot take so broad a survey 
of his trade, or look so far ahead ; he must often be content 
to follow the lead of others. And he must spend much of his 
time on work that is below him ; for if he is to succeed at all, 
his mind must be in some respects of a high quality, and 
must have a good deal of originating and organizing force; 
and yet he must do much routine work. 

On the other hand the small employer has advantages of 
The small ^^^ own. The master's eye is everywhere ; there 
manufacturer jg j^q shirking by his foremen or workmen, no 

Ccin s&vc in 

superintend- divided responsibility, no sending half-understood 
ence, messages backwards and forwards from one de- 

partment to another. He saves much of the book-keeping, 
and nearly all of the cumbrous system of checks that are 
necessary in the business of a large firm ; and the gain from 
this source is of very great importance in trades which use 
the more valuable metals and other expensive materials. 

And though he must always remain at a great disadvant- 

and he gains ^S^ ^^ g^^^i^g information and in making experi- 
much from the ments, yet in this matter the general course of 

modem diffu- . 

sion of trade- progress IS on his Side. For External economies 
now edge. ^^^ constantly growing in importance relatively 
to Internal in all matter's of trade-knowledge : newspapers, 
and trade and technical publications of all kinds are per- 
petually scouting for him and bringing him much of the 
knowledge he wants — knowledge which a little while ago 
would have been beyond the reach of anyone who could not 
affoi"d to have well-paid agents in many distant places. Again, 
it is to his interest also that the secrecy of business is on the 
whole diminishing, and that the most important improvements 
in method seldom remain secret for long aftei- they have 
passed from the experimental stage. It is to his advantage 



that changes in manufacture depend less on mere rules of 
thumb and more on broad developments of scientific principle; 
and that many of these are made by students in the pursuit 
of knowledge for its own sake, and are promptly published 
in the general interest. Although therefore the small manu- 
facturer can seldom be in the front of the race of progress, he 
need not be far from it, if he has the time and the ability foi- 
availing himself of the modern facilities for obtaining know- 
ledge. But it is time that he must be exceptionally strong if 
he can do this without neglecting the minor but necessary 
details of the business. 

The advantages which a large business has over a small 
one are conspicuous in manufacture, because, as 
we have noticed, it has special facilities for con- ^rantport"** 
centrating a great deal of work in a small area, mining, agri- 
But there is a strong tendency for large estab- *""**""• 
lishments to drive out small ones in many other industries; 
in particular the retail trade is being transformed, and the 
small shopkeeper is losing ground daily. Large firms are 
gaining rapidly in the Transport Industries, to a less extent 
in mining and very little if at all in agriculture'. 

1 The small shopkeeper has special facilities for bringing his goods to the 
door of his customers ; for humouring their several tastes ; and for kuo>ving 
enough of them individuaUy to be able safely to sell on credit. But the im- 
portance of these advantages is diminishmg. Meanwhile cycles, tramways 
&c. are making it easier for customers to visit large central establishments 
for the purchase of those goods which it is important to select from a large 
and varied stock and one which is constantly renewed with changing fashions- 
while groceries and other goods of which the small shopkeeper could keep a 
fair supply are conveniently obtained by a written order from the price list of 
shops or stores which turn over their stock rapidly and keep eveiything fresh. 
See Princiiihfi IV. xi. 6, 7. 







§ 1. Business may be taken to include all provision for 
the wants of others which is made in the ex- 
management pectation of payment direct or indirect from those 
has many ^jj^ ^^e to be benefited. It is thus contrasted 


with the provision for our own Wtants which each 
of us makes for himself, and with those kindly services which 
are prompted by family affection and the desire to promote 
the well-being of others. 

Even in modem England we find now and then a village 
Primitive artisan who adheres to primitive methods, and 
methods. makes things on his own account for sale to his 
neighbours ; managing his own business and undertaking all 
its risks \ But such cases are rare: and in the greater part 
The modern ^^ ^^^^ business of the modern world the task of 
undertaker, ^q directing production that a given effort may 
be most effective in supplying human wants has to be broken 
up and given into the hands of a specialized body of em- 
ployers, or to use a more general term, of business men. They 
"adventure" or "undertake" its risks; they bring together 
the capital and the labour required for the work; they arrange 
or "engineer" its general plan, and superintend its minor 
details. Looking at business men from one point of view we 

^ The most striking instances of an adherence to old-fashioned methods of 
business are supplied by the learned professions ; for a physician or a solicitor 
manages as a rule his own business and does all its work. 



may regard them as a highly skilled industrial grade, from 
another as middlemen intervening between the manual worker 
and the consumer. 

There are some kinds of business men who undertake 
great risks, and exercise a large influence over subdivision of 
the welfare both of the producers and of the the tasks of 
consumers of the wares in which they deal, but and^^perin- 
who are not to any considerable extent direct em- tendence. 
ployers of labour. F©r instance some Mancliester warehouse- 
men give themselves to studying the movements of fashion, 
the markets for raw materials, the general state of trade, of 
the money market and of politics, and all other causes that 
are likely to influence the prices of different kinds of goods 
during the coming season ; and after employing, if necessary, 
skilled designers to carry out their ideas, they give out to 
manufacturers in different parts of the world contracts for 
making the goods on which they have determined to risk their 
capital. And in the clothing trades and some others, we see 
a revival of what has been called the " house House indus- 
industry," which prevailed long ago in the textile *"^s- 
industries; that is, the system in which large undertakers 
give out work to be done in cottages and very small work- 
shops to persons who work alone or with the aid of some 
members of their family, or who perhaps employ two or three 
hired assistants. In remote villages in almost every county 
of England agents of large undertakers come round to give 
out to the cottagers partially prepared materials for goods of 
all sorts, but especially clothes such as shirts and collars and 
gloves; and take back with them the finished goods. It is 
however in the great capital cities of the world, and in other 
large towns, especially old towns, where there is a great deal 
of unskilled and unorganized labour, with a somewhat low 
physique and morale, that the system is most fully developed, 
especially in the clothing trades, which employ two hundred 
thousand people in London alone, and in the cheap furniture 




BOOK IV. CH. XTT. §§ 1, 2. 

trades. There is ji continual contest between the factory 
and the domestic system, now one gaining ground and now 
the other: for instance just at present the growing use of 
sewing-machines worked by steam power is strengthening the 
position of the factories in the boot trade ; while factories and 
workshops are getting an increased hold of the tailoring trade. 
On the other hand the hosiery trade is being tempted back to 
the dwelling-house by recent improvements in hand knitting 
machines ; and it is possible that new methods of distributing 
power by gas and petroleum and electric engines may exercise 
a like influence on many other industries. 

Or there may be a movement towai-ds intermediate plans, 
Sheffield similar to those which are largely followed in the 

trades. Sheffield trades. Many cutlery firms for instance 

put out grinding and other parts of their work, at piece-work 
prices, to working men who rent the steam power which they 
require, either from the firm from whom they take their 
contract or from someone else: these workmen sometimes 
employing others to help them, sometimes working alone. 

Thus there are many ways in which those who undertake 
the chief risks of buying and selling may avoid the trouble of 
housing and superintending those who work for them. They 
all have their advantages ; and when the workers are men of 
strong character, as at Sheffield, the results are on the whole 
not unsatisfactory. But unfortunately it is often the weakest 
class of workers, those with the least resource and the least 
self-control who drift into work of this kind. The elasticity 
of the system which recommends it to the undertaker, is 
really the means of enabling him to exercise, if he chooses, an 
undesirable pressure on those who do his work. 

For while the success of a factory depends in a great 
measure on its having a set of operatives who adhere steadily 
to it, the capitalist who gives out work to be done at home 
has an interest in retaining a great many persons on his 
books ; he is tempted to give each of them a little employ- 

< 4 



ment occasionally and play them oiF one against another ; and 
this he can easily do because they do not know one another, 
and cannot arrange concerted action'. 

§ 2. When the profits of business are under discussion 
they are generally connected in people's minds 
with the employer of labour: "the employer" is required in the 
often taken as a term practically coextensive '^**' manu- 

• 1 1 • /• 1 • n -rt ^ 'acturer. 

With the receiver of business profits. But the 
instances which we have just considered are sufficient to illus- 
trate the truth that the superintendence of labour is but one 
side, and often not the most important side of business work ; 
and that the employer who undertakes the whole risks of his 
business really performs two entirely distinct services on 
behalf of the community, and requires a twofold ability. 

The ideal manufacturer, for instance, if he makes goods 
not to meet special orders but for the general market, must, 
in his first role as merchant and organizer of production, have 
a thorough knowledge of things in his own trade. He must 
have the power of forecasting the broad movements of pro- 
duction and consumption, of seeing where there is an oppor- 
tunity for supplying a new commodity that will meet a real 
want or improving the plan of producing an old commodity. 
He must be able to judge cautiously and undertake risks 
boldly; and he must of course understand the materials and 
machinery used in his trade. 

But secondly in this r6le of employer he must be a natural 
leader of men. He must have a power of first choosing his 
assistants rightly and then trusting them fully ; of interesting 
them in the business and of getting them to trust him, so as 
to bring out whatever enterprise and power of origination 
there is in them ; while he himself exercises a general control 
over everything, and preserves order and unity in the main 
plan of the business. 

1 The subject of this sectiou is studied a good deal more fully in Pnnci;^es 
IV. XII. 1—4. 



BOOK IV. CH. XII. 5^ 2^-4. 

The abilities required to make an ideal employer are so 
great and so numerous that very few persons can exhibit them 
all in a very high degree. Their relative importance however 
varies with the nature of the industry and the size of the 
business ; and while one employer excels in one set of quali- 
ties, another excels in another; scarcely any two owe their 
success to exactly the same combination of advantages. Some 
men make their way by the use of none but noble qualities, 
while others owe their prosperity to qualities in which there 
is veiy little that is really admirable except sagacity and 
strength of purpose. 

Such then being the jjeneral nature of the work of business 
management, we have next to inquire what opportunities 
diiferent classes of people have of developing business ability ; 
and, when they have obtained that, what opportunities they 
have of getting command over the capital required to give it 

§ 3. The son of a man already established in business 
The son of a starts with SO many advantages that we might 
business man expect business men to constitute a sort of caste ; 

st&rts with 

many advan- dividing out among their sons the chief posts of 
tages, command, and founding hereditary dynasties, 

which ruled certain branches of trade for many generations 
together. But it is not so. 

A man who gets together a great business by his own 
efforts has probably been brought up by parents of strong 
but also with earnest character, and educated by their personal 
disadvantages, influence and by struggle with difficulties in early 
life. But his children, at all events if they were born after 
he became rich, and in any case his grandchildren, are perhaps 
left a good deal to the care of domestic servants who are not 
of the same strong fibre as the parents by whose influence he 
was educated. And while his highest ambition was probably 
success in business, they are likely to be at least equally 
anxious for social distinction. 




For a time indeed all may go well. His sons find a firmly 
established trade connection, and what is perhaps even more 
important, a well-chosen staff of subordinates with a generous 
interest in the business. By mere assiduity and caution, 
availing themselves of the traditions of the firm, they may 
hold together for a long time. But when a full generation 
has passed, when the old traditions are no longer a safe guide, 
and when the bonds that held together the old sUifi" have been 
dissolved, then the business almost invariably falls to pieces 
unless it is practically handed over to the management of new 
men who have meanwhile risen to partnership in the firm. 

But in most cases his descendants arrive at this result by 
a shorter route. They prefer an abundant income coming to 
them without effort on their part, to one which though twice 
as large could be earned only by incessant toil and anxiety ; 
and they sell the business to private persons or a joint-stock 
company; or they become sleeping partners in it; that is 
sharing in its risks and in its profits, but not taking part in 
its management : in either case the active control over their 
capital falls chiefly into the hands of new men. 

§ 4. The oldest and simplest plan for renovating the 
energies of a business is that of taking into Private part- 
partnership some of its ablest employes. Or "erships. 
again two or more people may combine their resources for a 
large and difficult undertaking. In such cases there is often 
a distinct partition of the work of management : in manu- 
factures for instance one partner will sometimes give himself 
almost exclusively to the work of buying raw material and 
selling the finished product, while the other is responsible for 
the management of the factory : and in a trading establish- 
ment one partner will control the wholesale and the other the 
retail department. In these and other ways private partner- 
ship is capable of adapting itself to a great variety of problems : 
it is very strong and very elastic ; it has played a great part in 
the past, and it is full of vitality now. 


BOOK IV. CH. XII. § 5. 



§ 5. But from the end of the Middle Ages to the present 
time there has been in some classes of trades a movement 
Joint-stock towards the substitution of public joint-stock 
companies. companies, the shares of which can be sold to 
anybody in the open market, for private companies, the shares 
in which are not transferable without the leave of all con- 
cerned. The eifect of this change has been to induce people, 
many of whom have no special knowledge of trade, to give 
their capital into the hands of others employed by them : and 
there has thus arisen a new distribution of the various parts 
of the work of business management. 

The ultimate undertakers of the risks incurred by a joint- 
stock company are the shareholders; but as a rule they do 
not take much active part in engineering the business and 
controlling its general policy ; and they take no part in super- 
intending its details. After the business has once got out of 
the hands of its original promoters, the control of it is left 
chiefly in the hands of Directors ; who, if the company is a 
very large one, probably own but a very small proportion of 
its shares, while the greater part of them have not much 
technical knowledge of the work to be done. They are not 
generally expected to give their whole time to it ; but they 
are supposed to bring wide general knowledge and sound 
judgment to bear on the broader problems of its policy; and 
at the same time to make sure that the "Managers" of the 
company are doing their work thoroughly. To the Managers 
and their assistants is left a great part of the work of engi- 
neering the business, and the whole of the work of superin- 
tending it : but they are not required to bring any capital 
into it ; and they are supposed to be promoted from the lower 
ranks to the higher according to their zeal and ability. Since 
the joint-stock companies in the tJnited Kingdom have an 
aggregate income of £100,000,000, and do a tenth of the busi- 
ness of all kinds that is done in the country, they offer very 
large opportunities to men with natural talents for business 




management, who have not inherited any material capital, or 
any business connection. 

Joint-stock companies have great elasticity and can expand 
themselves without limit when the work to which they have 
set themselves offers a wide scope; and they are gaining 
ground in nearly all directions. But they have one great 
source of weakness in the absence of any adequate knowledge 
of the business on the part of the shareholders who undertake 
its chief risks ; though a few of the larger shareholders often 
exert themselves to find out what is going on ; and are thus 
able to exercise an effective and wise control over the general 
management of the business ^ It is a strong proof of the 
marvellous growth in recent times of a spirit of honesty and 
uprightness in commercial matters, that the leading officers of 
great public companies yield as little as they do to the vast 
temptations to fraud which lie in their way. If they showed 
an eagerness to avail themselves of opportunities for wrong- 
doing at all approaching that of which we read 

^ ^^ „,...,.. The system 

in the commercial history of earlier civilizations, rendered 
their wrong uses of the trust imposed in them ^y J^f^^^dern 
would have been on so great a scale as to prevent growth of busi- 
the development of this democratic f(^rm of busi- 
ness. There is every reason to hope that the progress of trade 
morality will continue, and that it will be aided in the future 
as it has been in the past, by a diminution of trade secrecy 

1 It is true that the head of a large private firm undertakes the chief risks 
of the business, while he intrusts many of its details to others ; but his i>osi- 
tiou is secured by his power of forming a direct judgment as to whether his 
subordinates serve his interests faithfully and discreetly. If those to whom he 
has intrusted the buying or selUug of goods for him take commissions from 
those with whom they deal, he is in a position to discover and punish the 
fraud. If they show favouritism and promote incompetent relations or 
friends of their own, or if they themselves become idle and shirk their work, 
or even if they do not fulfil the promise of exceptional ability which induced 
him to give them their first lift, he can discover what is going wrong and set 
it right. But in all these matters the great body of the shareholders of a 
joint-stock company are, save in a few exceptional instances, almost powerless. 




BOOK IV. CH. XII. §§ 5, G. 

and by increased publicity in every form ; and thus collective 
and democratic forms of business management may be able to 
extend themselves safely in many directions in which they 
have hitherto failed, and may far exceed the great services 
they already render in opening a large career to those who 
have no advantages of birth. 

The same may be saicl of the undertakings of Giwernments 
Government imperial and local : they also may have a great 
undertakings, future before them, but up to the present time 
the tax-payer who undertakes the ultimate risks has not gene- 
rally succeeded in exercising an efficient control over the 
businesses, and in securing officers who will do their work 
with as much energy and enterprise as is shown in private 
establishments. The problem of Government undertakings 
involves however many complex issues, into which we cannot 

inquire here. 

§ 6. The system of Co-operation aims at avoiding the 
^ ^. evils of these two methods of business manage- 

Co-operative • cj • i. 

association. ment. In that ideal fonn of Co-operative feociety, 
for which many still fondly hope, but which as yet has been 
scantily realized in practice, a part or the whole of those 
shareholders who undertake the risks of the business are 
themselves employed by it. The employes, whether they con- 
tribute towards the material capital of the business or not, 
have a share in its profits, and some power of voting at the 
general meetings at which the broad lines of its policy are laid 
down, and the officers appointed who are to cany that policy 
into eifect. They are thus the employers and masters of their 
own managers and foremen ; they have fairiy good means of 
judging whether the higher work of engineering the business 
is conducted honestly and efficiently, and they have the best 
possible opportunities for detecting any laxity or incompetence 
ill its detailed administration. And lastly they render unne- 
cessiiiy some of the minor work of superintendence that is 
required in other establishments; for their own pecuniary 



interests and the pride they take in the success of their own 
business make each of them averse to any shirking of work 
either by himself or by his fellow workmen. 

But unfortunately the system has very great difficulties of 
its own. For human nature being what it is, the ^^^ ^j^^^ities 
employes themselves are not always the best pos- in the task of 
sible masters of their own foremen and managers; ^g*;^*^^/"*"" 
jealousies and f rettings at reproof are apt to act 
like sand, that has got mixed with the oil in the bearings of a 
great and complex machinery. And in particular, since the 
hardest work of business management is generally that which 
makes the least outward show, those who work with their 
hands are apt to underrate the intensity of the strain involved 
in the highest work of engineering the business, and to grudge 
its being paid for at anything like as high a rate as it could 
earn elsewhere. And in fact the managers of a Co-operative 
Society seldom have the alertness, the inventiveness and the 
ready versatility of the ablest of those men who have been 
selected by the struggle for survival, and have been trained 
by the perfectly free and unfettered responsibility of private 
business. Partly for these reasons the co-operative system has 
seldom been carried out in its entirety ; and its partial appli- 
cation has so far attained its highest success in the task of 
retailing commodities consumed by working men— a task in 
which it has special advantages. But bond fide co-operative 
production is now at last making excellent progress. 

Those working-men indeed whose tempers are strongly 
individualistic, and whose minds are concentrated j^ ^^^ ^^^_ 
almost wholly on their own affairs, will perhaps grow some of 

*' t > ' ^ these. 

always find their quickest and most congenial 
path to material success by commencing business as small 
independent " undertakers," or by working their way upwards 
in a private firm or a public company. But co-operation has 
a special charm for those in whose tempers the social element 
is stronger, and who desire not to separate themselves fix)m 



BOOK IV. CH. XII. § 6, 7. 

their old comrades, but to work among them as their leadere. 
Its aspirations may in some respects be higher than its prac- 
tice ; but it undoubtedly does rest in a great measure on 
ethical motives. The true co-operator combines a keen busi- 
ness intellect with a spirit full of an earnest Faith ; and some 
co-operative societies have been serv'^ed excellently by men of 
great genius both mentally and morally — men who for the 
sake of the Co-operative Faith that is in them, have worked 
with great ability and energy, and with perfect uprightness, 
being all the time content with lower pay than they could 
have got as business managers on their own account or for a 
private firm. Men of this stamp are more common among the 
officers of co-operative societies than in other occupations; 
and though they are not very common even there, yet it may 
be hoped that the diffusion of a better knowledge of the true 
principles of co-operation, and the increase of general educa- 
tion are every day fitting a larger number of co-operators for 
the complex problems of business management. 

Meanwhile many partial applications of the co-operative 
principle are being tried under various conditions, 
each of which presents some new aspect of busi- 
ness management. Thus under the scheme of Profit-Sharing, 
a private firm while retaining the unfettered management of 
its business, pays its employes the full market rate of wages 
whether by Time or Piece-work, and agrees in addition to 
divide among them a certain share of any profits that may be 
mtide above a certain fixed minimum ; it being hoped that the 
firm will find a material as well as a moral reward in the 
diminution of friction, in the increased willingness of their 
employes to go out of their way to do little things that may 
be of great benefit comparatively to the firm, and lastly in 
attracting to themselves workers of more than average ability 
and industry*. 

1 111 Schloss' Methods of Remuneration the relation of Profit sharing to 
co-oi)eratioD and other forms of " Gain sharing " is well shown. 

Profit Sharing. 




Other partial co-operative schemes are doing good work in 
various degrees. For instance the Oldham Cotton ^^^^^ ^^^^^ ^^ 
Mills are really j(jint-stock companies : but partial Co- 
among their shareholders are many working men °^*'"* *°"' 
who have a special knowledge of the trade, tliough not many 
of their own employes. There is a larger element of co- 
operation in the Productive establishments, owned by the 
main body of Co-operative Stores, through their agents, the 
Co-operative Wholesale Societies. Here the Scotchmen are 
in advance ; in the English Society the workers as such have 
as yet no direct share either in the management or in the 
profits of the works. 

But we must not pui-sue this inquiry further now : enough 
has been said to show that the world is only Hopes for the 
just beginning to be ready for the higher work ^"*"''^- 
of the co-operative movement in its many different forms. 
It may therefore be reasonably expected to attain a much 
larger success in the future than in the past ; and to offer 
excellent opportunities for working-men to practise themselves 
in the work of business management, to grow into the trust 
and confidence of others, and gradually rise to posts in which 
their business abilities will find scope. 

§ 7. In speaking of the difficulty that a working-man has 
in rising to a post in which he can turn his busi- ^he rise of the 
ness ability to full account, the chief stress is r^^'l^^"^-^*". 

•^ • 1 r, u" hindered by his 

commonly laid upon his want of capital : but this want of capi - 
is not always his chief difficulty. For instance **^' 
the co-operative distributive societies have accumulated a vast 
capital, on which they find it difficult to get a good rate of 
interest ; and which they would be rejoiced to lend to any set 
of working-men who could show that they had the capacity 
for dealing with difficult business problems. Co-operators who 
have firstly a high order of business ability and probity, and 
secondly the "personal capital" of a great reputation among 
their fellows for these qualities, will have no difficulty in 



BOOK IV. CH. XII. § 7. 

getting command of enough material capital for a considerable 
undertaking: the real difficulty is to convince a sufficient 
number of those around them that they have these rare quali- 
ties. And the case is not very different when an individual 
endeavours to obtain from the oi-dinary sources the loan of 
the capital required to start him in business. 

It is true that in almost every business there is a constant 
increase in the amount of capital required to make a fair 
start ; but there is a much more rapid increase in the amount 
of capital which is owned by people who do not want to use 
it themselves, and are so eager to lend it out that they will 
accept a constantly lower and lower rate of interest for it. 
Much of this capital passes into the hands of bankers and 
others, people of keen intellect and restless energy; people 
who have no class prejudices and care nothing for social 
distinctions; and who would promptly lend it to anyone of 
whose business ability and honesty they were convinced. To 
say nothing of the credit that can be got in many businesses 
from those who supply the requisite raw material or stock in 
trade, the opportunities for direct borrowing are now so great 
that an increase in the amount of capital required for a start 
in business is no very serious obstacle in the way of a person 
who has once got over the initial difficulty of earning a repu- 
tation for being likely to use it well. 

But perhaps a greater, though not so conspicuous, hind- 

ranee to the rise of the working man is the 
and even more . • * *""ii xo unc 

by the growing growing Complexity of business. The head of a 
buTinS'^ °^ business has now to think of many things about 
which he never used to trouble himself in earlier 
days ; and these are just the kind of difficulties for which the 
training of the workshop affords the least preparation. Against 
this must be set the rapid improvement of the education of 
the working man not only at school, but what is more im- 
portant, in after life by newspapers, and from the work of 
co-operative societies and trades unions, and in other ways. 




About three-fourths of the whole population of England 
belong to the wage-earning classes ; and at all events when 
they are well fed, properly housed and educated, they have 
their fair share of that nervous strength which is the raw 
material of business ability. Without going out of their way 
they are all consciously or unconsciously competitors for posts 
of business command. The ordinary workman, if he shows 
ability, generally becomes a foreman, from that he may rise 
to be a manager, and to be taken into partnership with his 
employer. Or having saved a little of his own he may start 
one of those small shops which still can hold their own in a 
working man's quarter, stock it chiefly on credit, and let his 
wife attend to it by day, while he gives his evenings to it. In 
these or in other ways he may increase his capital till he can 
start a small workshop, or factory. Once having made a good 
beginning, he will find the banks eager to give him generous 
credit. He must have time; and since he is not likely to 
start in business till after middle age he must have a long as 
well as a strong life; but if he has this and has also "patience, 
genius and good fortune" he is pretty sure to command a large 
capital before he dies. In a factory those who work with 
their hands, have better opportunities of rising to posts of 
command than the book-keepers and many others to whom 
social tradition has assigned a higher place. But in trading 
concerns it is otherwise ; what manual work is done in them 
has as a rule no educating character, while the experience of 
the office is better adapted for preparing a man to manage a 
commercial than a manufacturing business. 

There is then on the whole a broad movement from below 
upwards. Perhaps not so many as formerly rise . 

« , . . « *^ A rapid rise not 

at once irom the position of working-men to an unmixed 
that of employers : but there are more who get ***^"**^*- 
on sufficiently far to give their sons a good chance of attaining 
to the highest posts. The complete rise is not so very often 
accomplished in one generation; it is more often spread over 




two; but the total volume of the movement upwaifls is pro- 
bably greater than it has ever been. And it may be remarked 
in passing that it is better for society as a whole that the 
rise should be distributed over two generations. The work- 
men who at the beginning of this century rose in such largo 
numbers to become employei-s were seldom fit for posts of 
command: they were too often harsh and tyrannical; they 
lost their self-control, and were neither truly notle nor truly 
happy ; while their children were often haughty, extravagant, 
and self-indulgent, squandering their wealth on low and vulgar 
amusements, having the worst faults of the older aristocracy 
without their virtues. The foreman or superintendent who 
has still to obey as well as to command, but who is rising and 
sees his children likely to rise further, is in some ways more 
to be envied than the small master. His success is less con- 
spicuous, but his work is often higher and more important for 
the world, while his character is more gentle and refined and 
not less strong. His children are well-trained; and if they 
get wealth, they are likely to make a fairly good use of it. 

§ 8. When a man of great ability is once at the head of 
Adjustment of ^^ independent business, whatever be the route 
capital to busi- by which he has got thei-e, he will with moderate 
ness any. ^^^ fortune, soou be able to show such evidence 
of his power of turning capital to good account as to enable 
him to borrow in one way or another almost any amount that 
he may need ; and on the other hand a man with small ability 
in command of a large capital, speedily loses it: he may 
perhaps be one who could and would have managed a small 
business with credit, and left it stronger than he had found 
it : but if he has not the genius for dealing with great 
problems, the larger it is the more speedily will he break 
it up. 

These two sets of forces, the one increasing the capital 
at the command of able men, and the other destroying the 
capital that is in the hands of weaker men, bring about the 



result that there is a far more close correspondence between 
the ability of business men and the size of the businesses 
which they own than at first sight would appear probable. 
And when we consider all the many routes, by which a man 
of great natural business ability can work his way up high in 
some private firm or public company, we may conclude that 
wherever there is work on a large scale to be done in such a 
country as England, the ability and the capital required for it 
are pretty sure to be speedily forthcoming. 

Further, just as industrial skill and ability are getting 
every day to depend more and more on the broad faculties of 
judgment, promptness, resource, carefulness and steadfastness 
of purpose — faculties which are not specialized to any one 
trade, but which are more or less useful in all — so it is with 
regard to business ability. In fact business ability consists 
more of these general and non-specialized faculties than do 
industrial skill and ability in the lower grades: and the higher 
the grade of business ability the more various are its applica- 

Since then business ability in command of capital moves 
with great ease horizontally from a trade which gu i rice of 
is overcrowded to one which offers good openings business abi- 
for it : and since it moves with great ease verti- mand* of capi- 
cally, the abler men rising to the higher posts in **^' 
their own trade, we see, even at this early stage of our inquiiy, 
some good reasons for believing that in modem England the 
supply of business ability in command of capital accommodates 
itself, as a general rule, to the demand for it ; and thus has a 
fairly defined supply price. 

Finally, we may regard this supply price of business ability 
in conunand of capital as composed of three elements. The 
first is the supply price of capital ; the second is the supply 
price of business ability and energy; and the third is the 
supply price of that organization by which the appropriate 
business ability and the requisite capital are brought together. 
M. j2 


BOOK IV. CH. xir. § 8. 

The price of the iirst of these three elements is " Interest ; " 

Net and Gross ^® ^^^^^ ^^^^ *^^® P^^^^ ^^ ^^^ seconcl taken by 
Earnings of itself ''JVet Earnings of Management," and that 
anagement. ^£ ^^^ second and third taken together "Gross 
Earnings of Management." 

The last few years have seen a marked increase in the 
relative force of very large businesses in certain industries. 
The change has not l^een brought about by new principles in 
business organization, so much as by the development of pro- 
cesses and methods in manufacture and mining, in transport 
and banking, which are beyond the reach of any but very 
large capitals ; by the increase in the scope and functions of 
markets, and in the technical facilities for handling large 
masses of goods. But the change is important : and it will 
be fully investigated in Volume II., in connection with and in 
dependence on a study of the modern organization of markets 
for credit and for i^oods. 







§ 1. At the beginning „f thi.s Bo„k we saw how the extra 
Keturn of raw produce which Nature affords to 
an increased application of capital and labour ^''"•"'"'f the 
other thing.s being equal, tends in the long run o" WsS'oSl. « 
to diminish. In the remainder of the Book and "" "'""• 
especially in the last four chaptei^ we have looked at the other 
side of the shield, and seen how man's power of pi^uctive 
work increases with the volume of the work that he does. 
Considering first the that govern the supply of labour 
we saw how every increase in the physical, mental, and 
moral vigour of a people makes them more likely, other 
tbngs bemg equal, to rmr to adult age a large number of 
vigorous children. Turning next to the Growth of Wealth we 
observed how eveiy increase of wealth tends in many ways to 
make a greater increase more easy than before. And lastly 
we saw how every increase of wealth and every increase in the 
numbe,. and intelligence of the people increased the facilities 
for a highly developed Industrial Organization, which in its 

kbTur """ *" *' '°"'""'' "^"'""''^ "^ "^^'^ ""d 
_ Looking more closely at the economies arising from an 
increase m the scale of production of any kind of goods we 
found hat they fell into two classes-thie depended on tie 
general development of the industry and those dependent ou 
the resources of the individual houses of business enga<,ed in 
It and the emciency of their management; that is, into^e^Z 
and interml economies. 

J. *<— — ni 

h '■ 

"We saw how these latter economies are liable to constant 
fluctuations so far as any particular house is concerned, and 
therefore when we speak of the nonnal cost of production of 
any class of g(xxls we must suppose them to be produced by a 
Arm that is fairly representative of the whole body of pro- 
A Representa- ducere of those goods. Our Representative firm 
tive firm. must be one which has had a fairly long life, and 

fair success, which is managed with normal ability, and which 
has nonnal access to the economies. External and Intenial, 
which belong to that aggregate volume of production '.- 

The general argument of the present Book shows that an 
increase in the aggregate volume of production of anything 
will generally increase the size, and therefore the Internal 
economies possessed by this Representative finn ; and that it 
will always increase the External economies to which such a 
Arm has access ; and that thereby the firm will be enabled to 
manufacture at a less proportionate cost of labour and sacri- 
fice than before. 

In other words we say broadly that while the part which 
The Laws of ^^^^''^ pl'^js in production conforms to the Law 
Increasing Re- of Diminishing Return, the pai-t which man plays 

' conforms to the Law of Increasing lieturu, 

which may be stated thus : — An increase of capital and 
labour leads generally to an improved organization, which 
increases the efficiency of the work of capital and labour. 

Therefore in those industries which are not engfajred in 
raising raw produce an increase of capital and labour gene- 
rally gives a return increased more than in proportion; and 
further this improved organization tends to diminish or even 
override any increased resistance which Nature may offer to 
raising increased amounts of raw produce. If the actions of 
the Laws of Increasing and Diminishing Return are balanced 
and of Con- we have the Law of Constant Return and an 
stant Return, increased produce is obtained by labour and 
sacrifice increased just in proportion. 






For the two tendencies towards Increasing and Diminish- 
ing Return press constantly against one another. In the 
production of wheat and wool, for instance, the latter ten- 
dency has almost exclusive sway in an old country, which 
cannot import freely \ In turning the wheat into flour, or the 
wool into blankets, an increase in the aggregate volume of 
production brings some new economies, but not many ; for the 
trades of grinding wheat and making blankets are already on 
so great a scale that any new economies that they may attain 
are more likely to be the result of new inventions than of 
improved organization. In a country however in which the 
blanket trade is but slightly developed, these latter may be 
important; and then it may happen that an increase in the 
^ggJ^^g^^te production of blankets diminishes the proportionate 
difficulty of manufacturing by just as much as it increases that 
of raising the raw material. In that case the actions of the 
Liiws of Diminishing and of Increasing Return would just 
neutralize one another; and blankets would conform to the 
Law of Constant Return. But in most of the more delicate 
branches of manufacturing, where the cost of raw material 
counts for little, and in most of the modern transport indus- 
tries the Law of Increasing Return acts almost unopposed. 

§ 2. Our discussion of the character and organization of 
industry taken as a whole tends to show that an 

. ^1 1 « , , . Subject to cer- 

mcrease m the volume of labour causes in general, tain condi- 
other things being equal, a more than propor- **°"*' 
tionate increase in the total efficiency of labour. But we must 
not forget that other things may not be equal. The increase 
of numbers may be accompanied by more or less general 
Jidoption of unhealthy and enervating habits of life in over- 
crowded towns. Or it may have started badly, outrunning 
the material resources of the people, causing them with im- 
pei-fect appliances to make excessive demands on the soil; 

1 As regards the struggle of the two tendencies in agriculture, compare 
above Book iv. Ch. iii. § 5, 

an increase of 
numbers may 
be accom- 
panied by a 
more than 
increase of 
collective effi- 

BOOK IV. CH. XIII. § 2. 

and so to call forth the stern action of the Law of Diminishing 
Return as regards raw produce, without having the power of 
minimizing its effects: having thus begun with poverty, an 
increase in numbers may go on to its too frequent conse- 
quences in that weakness of character which unfits a people 
for developing a highly organized industiy. 

All this and more may be granted, and yet it remains true 
that the collective efficiency of a people with a 
given average of individual strength and skill 
may increase more than in proportion to their 
numbers. If they can for a time escape from 
the pressure of the Law of Diminishing Return 
by importing food and other raw produce ; if their 
wealth, not being consumed in great wars, increases 
at least as fast as their numbers; and if they avoid habits 
of life that would enfeeble them; then every increase in 
their numbers is likely for the time to be accompanied by a 
more than proportionate increase in their power of obtain- 
ing material goods. For it enables them to secure the many 
various economies of specialized skill and specialized machi- 
nery, of localized industries and profluction on a large scale : 
it enables them to have increased facilities of communication 
of all kinds ; while the very closeness of their neighbourhood 
diminishes the expense of time and effort involved in every 
sort of traffic between them, and gives them new opportunities 
of getting social enjoyments and the comforts and luxuries of 
culture in every form. It is true that against this must be 
set the growing difficulty of finding solitude and quiet and 
even fresh air. This deduction is a weighty one ; but there 
still remains a balance of good. 

Taking account of the fact that an increasing density of 
population generally brings with it access to new social enjoy- 
ments we may give a rather broader scope to this statement 
and say : — An increase of population accompanied by an equal 
increase in the material sources of enjoyment and aids to 




prixluction is likely to lead to a more than proportionate in- 
crease in the aggregate income of enjoyment of all kinds; 
provided firstly, an adequate supply of raw produce can be 
obtained without great difficulty, and secondly there is no 
such overcrowding as causes physical and moral vigour to be 
impaired })y the want of fresh air and light and of healthy 
and joyous recreation for the young. 

The accumulated wealth of civilized countries is at present 
growing faster than the population : and though 
it may be true that the wealth per head would J^g^rowth^of"^ 
increase somewhat faster if the population did ""mbers must 

. • p A IT jjg distinguish- 

not increase quite so last ; yet as a matter of fact ed from those 

an increase of population is likely to continue to ^eaiUi°^^^ °^ 
be accompanied by a more than proportionate 
increase of the material aids to production : and in England 
at the lyresent time^ with easy access to abundant foreign sup- 
plies of raw material, an increase of population is accompanied 
by a more than proportionate inci-ease of the means of satisfying 
human wants other than the need for light, fresh air, ttc. It 
must however be remembered that England's foreign supplies 
of raw produce may at any time be checked by changes in the 
trade regulations of other countries, and may be almost cut 
off by a great war ; while the naval and military expenditure 
which would be necessary to make the country fairly secure 
against this last risk, would appreciably diminish the benefits 
that she derives from the action of the Law of Increasinjr 
Return \ 

1 The Englishman Mill bursts into unwonted enthusiasm when speaking of 
the pleasures of wanderuig alone in beautiful scenery : and many American 
writers give fervid descriptions of the growing richness of human life as the 
backwoodsman finds neighbours settling around him, as the backwoods settle- 
ment developes into a village, the village into a town, and the town into a 
vast city. 






„ '^ ^L, K!."^^ '^^^^ °^ °""' "^"^ ^« shall iH, much 
occupied ^h the balancing of those economic forces of 
grow h and decay, which have been discussed in the last 

J 1 "Cf " T"""" ""*' *^ "^^ ""'^ ^^" of business 
h.™s. But for the present, we must turn to a simpler sort 

wei.t""""" or e Hbrium, resembling rather tifat of a 
weight suspended by an elastic string, or of several hall, 
resfng i„ a bowl. The present Book'is given to a « 
inqmry :nto the balancing of the forces of Demand ^d 
Supply these terms being used in their bn^adest sense that 
:s, as hinted at the end of the first chapter of Book IV ' iTL 

B^TflT *°^'*''"' "^ *'" "^"^ "°*'""' "* *•'"' ^^ ''"d of 

f. i ^' Y/'**".'^^'"'^"d ''"'1 «°PPly are spoken of in relation 
to one another, it is of course necessary that the n , ., T 
markets to which they refer should be the same Ma'HS"" °'" 
As Cournotsays " Economists understand by the term Market 
not any particular market-place in which things are bou^d.^ 
and sold, but the whole of any region in which buye 








and sellers are in such free intercoui^e with one another that 
the prices of the same goods tend to equality easily and 
quickly. Or again a^ Jevons says :-" Originally a market 
was a public place in a town where provisions and other 
objects were exposed for sale; but the wo«l has been geneml- 
..ed, so as to mean any b«ly of pei^ons who are in intimate 
busines.s relations and carry on extensive tran.sactions in any 
commodity. A great city may contain as many markets as 
there are important branches of trade, and markets may 
or may not be localized. The central point of a market is the 
public exchange, mart or auction rooms, where the tn^len, 

Mlrke^rn '"'i'T'"''' ^'''''"^'- ^"^ I^"don the Stock 
Maiket, the Com Market, the Coal Market, the Sugar Market 

and many others are distinctly localized; iu Manchester the 
Cotton Market, the Cotton Waste Market, and othe... Bu 
this distinction of locality is not nece-ssaiy. The trader, may 
be spread oyer a whole town, or region of countiy, and yet 
niake a market, if they are, by means of faii^, meetings, pub- 
hshed price lists, the post office or otherwise, in close ^ommu- 
nication with each other." 

thel*""! *''' r"", "'^'■'^ P"^""' ^ """-^^^ •«' the st«,nger is 
the tendency for the .same price to be paid for the same thing 

at the same tune ,n all parts of the market : but of coun,e if 
the market is large, allowance must be made for the expense 
of delivering the goods to diffei^nt purchasers; each of whom 
must be supposed to pay in addition to the market price a 
special charge on account of delivery". 

often m-^"u?^'^'"^ '"°"°"'''' '•«'-«'0"»'§« i" practice it is 
often difficult to asceitain how far the movements Bound ■ , 
of supply and demand in any one place are influ- a -rteV." "^ 
enced by those iu another. It is clear that +h» „„ w , 
enov nf tl,A +oi 1 .u . "^ general tend- 

ency of the telegraph, the printing press and steam traffic is 

to ».Ue Ws own rLuo.,iiXrHS„", tlr^" C^" """""^'^^ ""^'"^ 


BOOK V. CH. r. §§ 8, 4. 

to extend the area over which such influences act and to 
increase their force. The whole Western World may, in a 
sense, be regarded as one market for many kinds of stock 
exchange securities, for the more valuable metals, and to a 
less extent for w(X)l and cotton and even wheat ; proper allow- 
ance being made for expenses of transport, in which may be 
included taxes levied by any customs houses through which 
the goods have to pass. For in all these cases the expenses 
of transpoi-t, including customs duties, are not suflicient to 
prevent buyers from all parts of the Western World from 
competing with one another for the same supplies. 

There are many special causes which may widen or narrow 
General con- ^^^^ m^irket of any particular connnodity : but 
ditions of a nearly all those things for which there is a vei-y 

wide market • i i j. • • , i , 

for a thing. ^'"^^ market are in universal demand, and capable 

|r"ad!ng"*^ ^"^ '^^ ^^^« ^""^^^ '"^^ exactly described. Thus for 
instance cotton, wheat, and iron satisfy wants 
that are ui-gent and nearly univei-sal. They can be easily 
described, so that they can be bought and sold by persons at a 
distance from one another and at a distance also from the 
commodities. If necessary, samples can be taken of them 
which are truly representative: and they can even be "graded," 
as is the actual practice with regard to grain in America, by 
an independent authority; so that the purchaser may be secure 
that what he buys will come up to a given standard, though 
he has never seen a sample of the goods which he is buying, 
and perhaps would not be able himself to form an opinion on 
it if he did. 

Conmiodities for which there is a very wide market must 
also be such as will bear a long carriage : they 
must be somewhat durable, and their value must 
be considerable in proportion to their bulk. A thing which 
is so bulky that its price is necessarily raised very much when 
it is sold far away from the place in which it is produced, 
must as a rule have a narrow market. The market for common 







bricks for instance is practically confined to the near neigh- 
bourhood of the kilns in which they are made: they can 
scarcely ever bear a long carriage by land to a district which 
has any kilns of its own. But bricks of certain exceptional 
kinds have a market extending over a great part of England. 

§ 4. Let us then consider more closely the markets for 
things which satisfy in an exceptional way these conditions 
of being in general demand, cognizable and portable. They 
are, as we have said, stock exchange securities and the more 
valuable metals. 

Any one share or bond of a public company, or any bond 
of a government is of exactly the same value as 
any other of the same issue; and it can make change securi- 
no difference to any purchaser which of the two **^^' 
he buys. Some securities, principally those of comparatively 
small mining, shipping, and other companies, require local 
knowledge, and are not very easily dealt in except on the 
stock exchanges of provincial towns in their immediate neigh- 
bourhood. But the whole of England is one market for the 
shares and bonds of a large English railway. In ordinary 
times a dealer will sell, say. Midland Railway shares, even if 
he has not them himself ; because he knows they are always 
coming into the market, and he is sure to be able to buy 

But the strongest case of all is that of securities which are 
called "international," because they are in request in every 
part of the globe. They are the bonds of the chief govern- 
ments, and of very large public companies such as those of the 
Suez Canal and the New York Central Railway. For bonds 
of this class the telegraph keeps prices at almost exactly the 
same level in all the stock exchanges of the world. If the 
price of one of them rises in New York or in Paris, in London 
or in Berlin, the mere news of the rise tends to cause a rise in 
other markets ; and if for any reason the rise is delayed, that 
particular class of lK)nds is likely soon to be offered for sale in 







BOOK V. CH. T. S 4. 

the high priced market under telegraphic orders from the 
other markets, while dealers in the first market will be making 
telegraphic purchases in other markets. These sales on the 
one hand, and purchases on the other, strengthen the tendency 
which the price has to seek the same level everywhere ^ 

Stock exchanges then are the pattern on which markets 

The world- ^^^^ ^^^"' ^'^^^ ^^® heing formed for dealing in 
market for the niany kinds of produce which can be easily and 
precious me- exactly described, are portable and in general de- 
mand. The material commodities however which 
possess these qualities in the highest degree are gold and 
silver. For that very reason they have been chosen by com- 
mon consent for use as money, to represent the value of 
other things ; and the world-market for them is most highly 

At the opposite extremity to international stock-exchange 
securities and the more valuable metals are, firstly, thinc^s 
which nmst be made to order to suit particular individuals, 
such as well-fitting clothes; and secondly, perishable and bulky 
goods, such as fresh vegetables, which can seldom be profitably 
carried long distances. The first can scarcely be said to have 
a wholesale market at all; the conditions by which their 
price is determined are those of retail buying and selling, and 
the study of them may be postponed-. 

Thus the character of the markets varies with the area of 
Space over which they extend : but it varies even more with 

1 It is a characteristic fact that securities which are part of large issues 
are preferred on tlie Stock exchange. 

2 A man way not trouble himself much about small retail purchases: 
he may give half a crown for a packet of i)aper in one shop which he could 
have got for two shilHngs in another. But it is otherwise with wholesale 
prices. A manufacturer cannot sell a ream of paper for six shillings while 
his neighbour is seUing it at five. For those whose business it is to deal 
in paper know almost exactly the lowest price at which it can be bought, and 
will not pay more than this. The manufacturer has to sell at about the 
market price, that is at about the price at which other manfacturers are 
selling at the same time. 





the length of Time of which account is taken ; and we shall 
find that if the period is short, the supply is limited to the 
stores which happen to be at hand : if the period is longer, the 
supply will be influenced by the cost of pi-oducing the com- 
modity in question ; and if the period is very long, this cost 
will be influenced by the cost of producing the labour and the 
material things required for producing the conmiodity. We 
shall consider in the next chapter those temporary equilibria 
of demand and supply, in which the cost of producing the 
comnxxlity exerts either no influence or merely an indirect 

At a later stage we shall have to combine the difficulties 
with regard to time on the side of supply with those on the 
side of demand, of which something has already been said \ 

1 Book ui. Ch. IV. § 5. 




§ 1. The simplest case of balance, or equilibrium, between 
E uiiibrium <^<^sire and effort is found when a person satisfies 
between desire one of his wants by his own direct work. When 
a boy picks blackberries for his own eating, the 
action of picking may itself be pleasurable for a while; and 
for some time longer the pleasure of eating may be more than 
enough to repay the trouble of picking. But after he has 
eaten a good deal, the desire for more diminishes ; while the 
task of picking begins to bring weariness ; which may indeed 
be caused more by monotony than by fatigue. Equilibrium 
is readied, when at last his eagerness to play and his disincli- 
nation for the work of picking counterbalance the desire for 
eating. The satisfaction which he can get from picking 
fruit has arrived at its jnaximuin : for up to that time every 
fresh picking has added more to his pleasure than it has 
taken away; and after that time any further picking would 
take away from his pleasure more than it would add. 

In a casual bargain that one person makes with another, 
as for instance when two backwoodsmen barter a rifle for a 
canoe, there is seldom anything that can properly be called 
an equilibrium of supply and demand : there is probably a 
surplus of satisfaction on either side; for probably the one 

^ i. 



would be willing to give something besides the rifle for the 
canoe, if he could not get the canoe otherwise ; while the 
other would in case of necessity give something besides the 
canoe for the rifle. 

We may put aside as of little practical importance a class 
of dealings which has been much discussed. Thev «, . . 

, . Ill . *^ Market for 

relate to pictures by old masters, rare coins and unique or rare 
other tilings, which cannot be " graded " at all. *^'"^^- 
The price at which each is sold, will depend much on whether 
any rich persons with a fancy for it happen to be present at 
its sale. If not, it will probably be bought l)y dealers who 
reckon on being able to sell it at a profit ; and the variations 
in the price for which the same picture sells at successive 
auctions, great as they are, would be greater still if it were 
not for the steadying influence of professional purchasers. 

§ 2. Let us then turn to the ordinary dealings of modern 
life; and take an illustration from a corn-market in a country 
town, and let us assume for the sake of simplicity illustration 
that all the corn in the market is of the same ^'■°"' * '°f ^^ r 

corn-market of 

quality. The amount which each farmer or ^ true though 
other seller offers for sale at any price is equilibrium, 
governed by his own need for money in hand, and by his 
calculation of the present and future conditions of the market 
with which he is connected. There are some prices which 
no seller would accept, some which no one would refuse. 
There are other intermediate prices which would be accepted 
for larger or smaller amounts by many or all of the sellers. 
Everyone will try to guess the state of the market and to 
govern his actions accordingly. Let us suppose that in fact 
there are not more than 600 quarters, the holders of which 
are willing to accept as low a price as 35s. ; but that holders 
of another hundred would be tempted by 368.; and holders of 
yet another three hundred by 37s. Let us suppose also that 
a price of 375. would tempt buyers for only 600 quarters; 
while another hundred could be sold at 365., and yet another 


BOOK V. CH. II. ^ 2, 3. 
two huu<h-ed a. 35. The«e facts „,ay l^ put out in a Uble 

thus : — . 

At the price 


Holders will be 
willing to sell 

1000 quarters, 

Buyers will be 
willing to buy 

600 quarters. 
700 „ 


Of course some of those who are really willing to takP 
36. rather than leave the market without selling: will tot 
show at once that they are ready to accept that price, /nd 
m hke manner buyers will fence, and pretend to be less eager 
than they really are So the price may be tossed hither and 
h ther hke a shuttlecock, as one side or the other gets the 
be cer in the " haggling and bargaining " of the market But 
unless they are unequally matched ; unless, for instance, one side 
^ very simple or unfortunate in failing to gauge the strength of 
the o her side the pnce is likely to be never very far from 36. • 
and It IS n«.rly sure to be pretty close to 36. at the end of the 
market. For if a holder thinks that the buyers will really 
be aW^ to get at 3G. all that they care to take at that pri e 
he wi 1 be unwilling to let slip past him any offer that il 
well above that price. 

Buyers on their part will make similar calculations; and 
f at any time the price should rise considerably above 36. 
they will argue that the supply will .^ ^uch greater than 
the demand at that price : therefore even those of them who 
would rather pay that price than go unserved, wait: and by 
waiting they help to bring the price down. On the other 
hand, when the price is much below 36., even those sellei^ 
who would rather take the price than leave the market with 
their corn unsold, will argue that at that price the demand 
will be in excess of the supply: so they will wait, and by 
waiting help to bring the price up. ^ 

The price of 36. has thus some claim to be called the true 


equilibrium price: because if it were fixed on at the begin- 
ning, and adhered t. throughout, it would exactly equate 
demand and supply (i.e. the amount which buyers were wmi„. 
to purchase at that price would be just equal t<, that fo°r 
which sellers were willing to take that price); and because 
every dealer who has a perfect knowledge of the circumsi::! 
of the market expects that price to be established. If he see, 
the price differing much from 36. he expects that a chanl 

romeTLTy!'"^ '"'"' ^"' ^^ ^"^"^^"^ ^* »« '^'P^ i* ^ 

§ 3. We have already used the term "demand price'" 
to denote the pnce at which buyers can Ije found r ■ 
for any given amount of a thing in a market. no™a."pri«s. 
Thus in this market 37. is the demand price for 600 quarte,^; 
36«. for . 00 and so on. We have introduced a correspondin.: 

etr ^TTu *° ''"'"''^ *'" P"'"' -'■-h ''oWers of I 
commodity will be willing to take for any given amount 

Sr /ot; Tdt of ^^ *^ --'^ -- '--« -=; 

We have next to enquire what causes govern supply. 

pnces, that is prices which dealei. are willing to accept for 

tfZlr^T- /" '''' P^^^-* •''^''P*- - have looked 

stocks i"V/ ', " ""^'^ ^'^' ^"-^ ''-« -PPO-d the 
Htocks offered for sale to be already in existence But of 

ZXr ''"h' ^" '^^P^"^'^"* - "- ~* ot wheat 
sown m the preceding year; and that, in its turn, was largely 

wouir ~t I : '^™r' ^"^^^^ "- ^^ «- p"- -"ich ::^ 

would get for It in this year. This is the point at which 
we have to work in the next chapter. 

■ Book ni. Cb. m. § 1. 
* Book IV. Ch. I. 





§ 1. We have noticed that even in the corn-exchange 
of a country town on a market-day the equi- 
from market to libriuui price is affected by calculations of the 

normal price. «, ii- n i^* i j* 

future relations oi production and consumption ; 
while dealings for future delivery already predominate in 
the leading corn-markets of America and Europe, and are 
rapidly weaving into one web all the leading threads of trade 
in corn throughout the whole world. If it is thought that 
the growers of any kind of grain in any part of the world 
have been losing money, and are likely to sow a less area for a 
future har\'est, far-seeing dealers argue that prices are likely 
to rise as soon as that harvest comes into sight. Thus 
anticipations of that rise exercise an influence on present 
sales for future delivery, and that in its turn influences cash 
prices ; so that these prices are indirectly affected by estimates 
of the expenses of producing further supplies. But in this 
and the following chapters we are specially concerned with 
movements of price ranging over still longer periods than 
those for which the most far-sighted dealers in futures 
generally make their reckoning. 

§ 2. We may revert to the discussion of the analogy 
The account between the supply price and the demand price 
of supply price ^£ ^ commodity at the point at which we left it 

carried a little •' ^ 

further. at the end of the last chapter. We there noticed 

that corresponding to the demand price at which any amount 
of a commodity would find purchasers in a market, there is a 
supply price at which that amount would be offered for sale 
)w producei-s or their agents. We have to take account of 



the fact that the production of the commodity will probably 
require many different kinds of labour and the use of capital 
m many forms. The exertions of all the different kinds 
of labour that are directly or indirectly involved in makinc. 
It J together with the abstinences or rather the waitings 
required for saving the capital used in making it : all these 
efforts and sacrifices together will be called its 
Heal Cost of Production. The sums of money, Moty"cost of 
that have to be paid for these efforts and sacri- ^••°d"ction. 
fices, will be called either its Mone^ Cost of Production, or, 
(tor shortness) its Expenses of Production. They ex enses of 
are the prices which have to be paid in order to P^ductlom 
call forth an adequate supply of the efforts and waitings that 
are required for making it; or, in other words, they are its 
supply priced 

The raw material, machinery, labour, cfec, that are required 
for making a commodity may be called its Factors pactorsof p 
of Production. Its expenses of production when Auction." '"°" 
any given amount of it is produced are thus the supply prices 
of the corresponding quantities of its factors of production 
And the sum of these is the supply price of that amount of 
the commodity. 

§ 3. It must not be forgotten that trading expenses enter 
mto the expenses of production in almost every 
case; and that in some cases they are a very ^^ZZ' 
large part of the whole. For instance, the supply ^f'Tf c" 
pnce of wood in the neighbourhood of Canadian <"' P^duction. 
forests often consists almost exclusively of the price of the 
labour of lumber men : but the supply price of Canadian deal 

1 Mm and some other economists have foUowed the nractte^ nf ^-r 

money that'ka' tote to L^u?;,? ' Z^^^^ '» T^^ 'he outlay of 
difficulty and produce it 1^1 L „ • ^ "^ ^^^^ ^ overcome this 
tl.e othe";. witho'^t^ring exp^ic t wa^^^^^^^^^ 'T T/^" "' "'" t'™ '» 
standings and muchVrfen contov^™^' ""^ ''^ '"" '" """^ ■"-»■"»"■ 




3, 4. 

in the wholesale London market consists in a large measure of 
freights ; while the supply price of the same wood to a small 
retail buyer in an English country town is more than half 
made up of the charges of the railways and middlemen who 
have brought what he wants to his doors, and keep a stock of 
it ready for him. Again, the supply price of a certain kind of 
labour may for some purposes be analysed into the expenses of 
rearing, of general education and of special trade education. 

It is to be taken for granted that as far as the knowledge 
and business enterprise of the producers reach, they will in 
each case choose those factors of production which are best 
for their purpose ; that is, which will attain the desired end 
for the least outlay and trouble to themselves. Whenever 
it appears to the producers that this is not the case, they will. 
Principle of ^.s a rule, set to work to substitute the less 
Substitution, expensive method. We may call this for con- 
venience of reference, the Principle of Substitution. 

§ 4. In our typical market then we assume that the 
We assume forces of demand and supply have free play; 
demanYa^nd ^^*^ t\iQVQ is no combination among dealers on 
supply in the either side ; but each acts for himself, and there 
*"^'" ^ ' is much free competition; that is, buyers generally 

compete freely with buyers, and sellers compete freely with 
sellers. But though everyone acts for himself, his knowledge 
of what others are doing is supposed to be generally sufficient 
to prevent him from taking a lower or paying a higher price 
than others are doing. 

In such a market there is a definite demand price for each 
amount of the commodity, that is, a definite price at which 
each particular amount of the commodity can find purchasers 
in a year, or whatever other period we choose as our unit of 
time : the more of a thing is offered for sale in a market, the 
lower is the price at which it will find purchasers ; or in other 
words, the demand price for each unit diminishes with every 
increase in the amount offered. 




In like way there is a supply price, that is, a price which 
may be expected to call forth a supply of each particular 
amount in a unit of time. To give precision to the ideas, 
let us suppose that a person well acquainted 
with the woollen trade sets himself to inquire oAheTuppiy 
what would be the normal supply price of a ^^*'*'*^^^- 
certain number of millions of yards annually of a particular 
kind of cloth. He would have to reckon (i) the price of the 
wool, coal, and other materials which would be used up in 
making it, (ii) wear-and-tear and depreciation of the buildings 
machinery and other fixed capital, (iii) interest and insuranc^ 
on all the capital, (iv) the wages of those who work in the 
factories, and (v) the gross earnings of management (in- 
eluding insurance against loss) of those who undertake the 
risks, who engineer and superintend the working. He would 
of course estimate the supply prices of all these different 
tactors of production of the cloth with reference to the ' 
amounts of each of them that would be wanted ; and he would 
suppose the conditions of supply to be normal, and the 
expenses of production to be those of a Representative Firm^ 
And he would add them all together to find the supply price 
of the cloth. trf J f 

Let us suppose a list of supply prices (or a supply schedule) 
made on a similar plan to that of our list of demand prices (or 
demand schedule^: the supply price of each amount of the 
commodity m a year, or any other unit of time, being written 
against that amount. As the annual amount produced 
increases, the supply price increases, if nature is offerincr a 
sturdy resistance to man's efforts to wring from her a lar'^er 
supply of raw material, and if there is no great room for int^'ro- 
ducmg important new economies into the manufacture. But 
It might so happen that an increase in the volume of produc- 
tion would introduce new economies and enable the tendency 
to Increasing Ketuiii to prevail over that to Diminishing 
1 See Book iv. Ch. xiu. § 1. . See Book iii. Cli. m. § 2. 



4, 5. 

Return, so ;is ultimately to lessen the supply price of the 
commodity, and make it cheaper'. 

§ 5. When therefore the amount produced (in a unit of 
What is meant *™®) ^^ ^^^^ ^^^^ the demand price is greater 

HbrlSm.' *^*^ ^^^ ^"PP^^ P"''^' ^^^^ sellers receive more 

than is sufficient to make it worth their while to 
bring goods to market to that amount; and the amount 
brought forward for sale tends to increase. On the other 
hand, when the amount produced is such that the demand 
price is less than the supply price, sellers receive less than 
IS sufficient to make it worth their while to bring goods to 
market on that scale; so that those, who were just on the 
margin of doubt as to whether to go on producing, are decided 
not to do so, and the amount brought forward for sale tends 
to diminish. When the demand price is equal to the supply 
price, the amount produced has no tendency either to be 
increased or to be diminished ; it is in equilibrium. 

Further, if any accident should move the scale of production 
from its equilibrium position (or position of rest), there will 
be instantly brought into play forces tending to bring it back 
to that position ; just as, if a stone hanging by a string is 
displaced from its equilibrium position, the force of gravity 
will at once tend to bring it back to its equilibrium position ^ 

1 Compare above, p. 180. 

2 The foUowiug diagrams may help some readers. But they are not 
necessary for the argument, and may be omitted. 

Measuring, as in the case of the demand curve, amounts of the commocUty 
along Ox and prices parallel to Oi/, we get for each 
point M along Ox a Hne MP drawn at right angles 
to it measuring the supply price for the amount 
OM, the extremity of which, P, may be called 
a supj,!!/ point ; this price MP being made up of 
the supply prices of the several factors of pro- 
duction for the amount 03f. The locus of P may 
be called the supj^h/ curve. It is a curve such 
that, if from any point P on it a straight line 
PM be drawn i)erpendicular to Ox, PJ/ represents o n 

the price at which sellers will be forthcoming for 
an amount OM. 





§ 6. But in real life such oscillations arc seldom as 
rhythmical as those of a stone hanging freely from a string ; 
the comparison would be more exact if the string were 
supposed to hang in the troubled waters of a mill-race, whose 
stream was at one time allowed to flow freely. The problems 
and at another partially cut off. The demand o^ value in 
and supply schedules do not in practice remain less simple, 
unchanged for a' long time together, but are constantly being 
changed; and every change in them gives new positions to 
the centres about which the amount and the price tend to 

These considerations point to the great importance of the 
element of time in relation to demand and supply, to some 
study of which we now proceed. We shall gradually discover 
a great many different limitations of the doctrine that the 
price at which a thing can be produced represents its real 
cost of production, that is, the efforts and sacrifices which 
have been directly and indirectly devoted to its production. 
That doctrine would indeed represent facts accurately enough 
in a stationary society, in which the habits of life, and the 
methods and volume of production remained unchanged from 
one generation to another; provided that people were tolerably 
free to choose those occupations for their capital and labour 
which seemed most advantageous. 

This is the real drift of that much-quoted, and much- 
misunderstood doctrine of Adam Smith and other economists 

To represent the equilibrium of demand and supply geometrically we may 
draw the demand and supply curves together as ui 
Fig. .'>. If then OR represents the rate at which 
production is being actually carried on, and lid the 
demand price is greater than Rs the supply price, 
the production is exceptionally profitable, and will 
be hicreased: and U will move to the right. On 
the other hand, if Ud is less than Rs, R will move 
to the left. If Rd is equal to Rs, that is, if R is 
vertically under a point of intersection of the curves, 
demand and supply are in equilibrium. 

BOOK V. CH. in. §§ (i, 7. 

that tl.e normal or 'natural," value of a con.modity is that 
which economic forces tend to bring about in lU long „.„ 
it IS the average value which economic forces would brin.- 
about ,f the general conditions of life were stationary for a 
run ot time long enough to enable then, all to work out their 
full effect. The fact that the general conditions of life are 
not stationary is the source of many of the difficulties that 
problems '" Wlying economic doctrines to practical 

§ 7. Thus we see that utility and cost of production both 
play a part m governing value. And we might as reasonably 
dispute whether it is the upper or the under blade of a pair 
of scissors that cuts a piece of paper, as whether value is 
governed by utility or cost of production. It is true that 

mur/ndct. ^i?'" ?"f ^''^^ '« ''«W ««". and the cutting is 
of production e«ected by moving the other, we may say with 
on v,.u.. careless brevity that the cutting is done bv the 

LTt ef 'r T'^r -^ "°^ ^*"<=''' -urate'^at 
w to he excused only so long as it claims to be merely a 

popular and not a strictly scientific account of what a^tufli; 

sold^'J.h!! n """' ri' """"^ ' *'""« '^''•^''^y "-^^ h^- to be 
^oid, the prices which people will be willing to pay for it will 

a:rnTtr '^ *'r/""^^ "^ ""^^^ '*> *°^«^- -^^ tl 

amount they can afford to spend on it. Their desire to have 
t de,,ends partly on the chance that, if they do not buy it 
hey will be able i. get another thing like it at as low a price 
this depends on the causes that govern the supply of it^ and 
this again upon cost of production. But it ^1/ so happen 
that the stock to be sold is practically fixed This for 

hsh for the day is governed almost exclusively by the stock 
on the slabs in relation to the demand. And ff .''"1 
-•hooses to take the st«.k for granted ; and say tha U,!ZZ 
- governed by demand, his brevity may perhaps bo ox.^ 



so long as he does not claim strict accuracy. So again it may 
be pardonable, but it is not strictly accurate to say that the 
varying prices which the same rare book fetches, when sold 
and resold at Christie's auction room, are governed exclusively 
by demand. ■' 

Taking a case at the opposite extreme, we find some 
commodities which conform pretty closely to the law of 
constant return; that is to say, their average cost of pr«iuc- 
tion will be very nearly the same whether they are produced 
in small quantities or in large. In such a case the normal 
level about which the market price fluctuates will be this 
dehmte and fixed money cost of production. If the demand 
happens to be great, the market price will rise for a time 
above the level ; but as a result production will increase and 
the market price will fall. Conversely, if the demand falls 
tor a time below its ordinary level, production will fall off 
and the market price will be raised. 

If, then, a person chooses to neglect market fluctuations : 
and Ukes it for granted that there will anyhow be enough 
demand for the commodity to insure that some of it, more 
or les.s will find purchasers at a price equal to this cost 
of production, then he may be excused for ignoring the 
influence of demand, and speaking of normal price as governed 
by cost of production-provided only he does not claim 
scientific accuracy for the wonling of his doctrine, and 
explains the influence of demand in its right place 

Thus we may say that, as a general rule, the shorter the 
period which we are considering, the greater must be the 
«hare of our attention which is given to the influence of 
demand on ,^lue; and the longer the period, the more 
important will be the influence of cost of production on 



BOOK V. CH. lU. § 8. 


§ 8. There is one very difficult point, on which a few 
words must be said here. It is the relation in which money 
cost, or expenses, of production stands to rent. 

The expenses of production of agricultural produce are 
estimated on the margin of cultivation. That is, they are 
estimated for a part of the produce which is raised either on 

Rent in reia- ^^""^ ^^^^ P^^^ ""^ ""^^^ because it is poor Or badly 
tiontoexpen- situated; or, which is more probable, they are 

ses^of produc. ^^^^^ ^^ ^^^^ ^^^^^ ^^^ ^^^^ ^^^^^ ^^^ ^^ ^^^^^ 

cations of capital and labour which only just pay 
their way, and therefore can contribute nothing towards the 
rent \ It is these expenses which the demand price must just 
cover : for if it does not, the supply will fall off, and the price 
be raised till it does cover them. It is to these expenses 
therefore that the price conforms : and, as Kicardo pointed 
out, rent does not appear as an element of them. 

Suppose for instance that, with an average harvest ten 
million quarters of com are raised in England, and that the 
expenses of production of the last million quarters are at the 
rate of 35^. a quarter. If the farmers had expected to 
less than 3ds. a quarter they would not have raised these list 
quarters. And since they find it worth their while to raise 
the whole ten million, we know that in an average year they 
get 35.. for each of the last million. And in the same murket 
there can only be one price for one and the same commodity 
Therefore they must have expected the average price of all 
the com in the market to be S5s. 

The Expenses of production of some of the corn may have 
been only 25.. a quarter. The 35.. got for a quarter of this 
com IS divided into 25.. which goes to the farmer, and 10. 
which goes to the landlord as rent. And if a person looks at 
this corn he may argue that its whole expenses of production 
were 25.. to cover the farmer's outlay and 10.. to pay his rent, 

1 Compare above, Book iv. Cli. in. § 2. 


and that therefore rent enters into the expenses of production 
of this com. He would be right if he meant only that the 
expenses of production of this particular quarter of corn 
cannot be found by merely reckoning up the wages and profits 
of the labour and capital that were spent in raising it But 
he would be wrong if he meant that the selling price of corn 
was governed by the rent that has to be paid for the use of 
land. He would then be mistaking cause for effect, and effect 
for cause. Rent is not the cause of a high price of corn, but 
Its effect. The price of com must be on the average just hic^h 
enough to cover the expenses of production of that portion of 
It which is raised under the most unfavourable conditions 
Ihe amount that is raised, and the price at which it is sold 
are thus governed by the numbers of the population which 
demand corn on the one hand, and by the amount of fertile 
land, which is the source of supply, on the other. A fertile 
land, which is specially suited for growing corn, is sure to be 
applied to that ; the rent obtained for that land does 
not therefore affect the supply of com, and does not therefore 
affect Its price. The price tends to equal the expenses of 
production of that which is raised under the most unfavour- 
able conditions and which pays no rent. The rent is govemed 
by the excess of this price over the expenses of production of 
the other produce that the farmer raises at less expense'. 

1 This difficult doctrme is further discussed iu Appendix C. 




g 1. Let us suppose a man to build a house for himself on 
Motives deter- land, and of materials, which nature supplies 
^sTmfnt^of*" y^«^*«> and to make his implements as he goes; 
capital. the labour of making them being counted as part 

of the labour of building the house. He would have to estimate 
the efforts required for building on any proposed plan ; and to 
allow almost instinctively an amount increasing in geometrical 
proportion (a sort of compound interest) for the period that 
would elapse between each effort and the time when the house 
would be ready for his use. The utility of the house to him 
when finished would have to compensate him not only for the 
efforts, but for the waitings'. 

This case illustrates the way in which the efforts and 
sacrifices which are the Real cost of production of a thing, 
underlie the expenses which are its Money cost. But the 
modem business man commonly takes the payments which he 
has to make, whether for wages or raw material, as he finds 
them ; without staying to inquire how far they are an accurate 
measure of the efforts and sacrifices to which they correspond. 
His expenditure is generally made piece-meal ; and the longer 
he expects to wait for the fruit of any outlay, the richer must 
that fruit be in order to compensate him. The anticipated 
fruit may not l)e certain ; and in that case he will have to 
allow for the risk of failure. After making that allowance, 

1 See above, Book iv. Ch. vin. § G. 




the fruit of the outlay must be expected to exceed the outlay 
itself by an amount which, independently of his own remu- 
neration, increases at compound interest in proportion to the 
time of waiting. 

§ 2. At the beginning of his undertaking, and at every 
successive stage, the business man is ceaselessly ^^^ principle 
striving so to modify his arrangements as to ob- of substitu- 
tain better results with a given expenditure or 
equal results with a less expenditure. He is continually studying 
the advantages and disadvantages of different ways of obtain- 
ing his object. He is always looking for new suggestions, 
watching the experiments of others and trying experiments 
himself, so as to hit upon that combination which will yield 
the largest incomings in proportion to any given outlay. In 
other words, he ceaselessly applies the principle of substitu- 
tion with the purpose of increasing his profits; and in so 
doing he seldom fails to increase the total efficiency of work, 
the total power over nature which man derives from organiza- 
tion and knowledge. 

Every locality has incidents of its own which affect in 
various ways the methods of arrangement of 

•^ . • J • '4. Different 

every class of business that is carried on m it. routes are 
But even in the same place and the same trade gj;°""„*d^^* 
no two persons pursuing the same aims will adopt 
exactly the same routes. The tendency to variation is a chief 
cause of progress ; and the abler are the undertakers in any 
trade the greater will this tendency be. In some trades, as 
for instance cotton-spinning, the possible variations are con- 
fined within narrow limits; no one can hold his own at all 
who does not use machinery, and very nearly the latest 
machinery, for every part of the work. But in others, as for 
instance in some branches of the wood and metal trades, in 
farming, and in shopkeeping, there can be great variations. 
For instance, of two manufacturers in the same trade, one 
will perhaps have a larger wages bill and the other heavier 



9 «> 

charges on account of machinery; of two retail dealers one 
wil have a larger capital locked up in stock and the other 
will spend more on advertisements and other means of build- 
ing up the immaterial capital of a profitable trade connection 
And m minor details the variations are numberless Each 
mans actions are influenced by his special opportunities and 
resources, as well as by his temperament and his associations 

But each man, taking account of his own means, will push 
the investment of capital in his business in each several direc- 
tion until what appears in his judgment to be the outer limit 
or margin, of profitableness is reached ; that is, until there 
seems to him no good reason for thinking that the gains 
resulting from any further investment in that particular 
direction would compensate him for his outlay. The margin 
of profitableness is not to be regarded as a mere point on a^'ny 
one fixed line of possible investment ; but as a boundary line 
of irregular shape cutting one after another every possible line 
ot investment. 

§ 3. When investing his capital in providing the means 
of carrying on an undertaking, the business man looks to 
being recouped by the price obtained for its various products • 
and he expects to be able under normal conditions to charc^e 
for each of them a sufficient price ; that is, one which ^vill not 
Prime or Only cover the specml, direct, or prirm cost but 

specai cost. also bear its proper share of the general expenses 
of the business; and these we may call its supplementary cost. 
Ihese two elements together make its total cost. 

There are great variations in the usage of the term Prime 
Suppiemen- ^^^^ ^^ business life. But it is taken here in a 
tar/ and total narrow sense. Supplementary costs are here 
taken to include standing charges on account of 
the durable plant in which much of the capital of the business 
has been invested, and also the salaries of the upper em- 
ployees : for the charges to which the business is put on 
account of their salaries cannot generally be adapted quickly 



to changes in the amount of work there is for them to do. 
There remains nothing but the (money) cost of the raw mate- 
rial used in making the commodity and the wages of that part 
of the labour spent on it which is paid by the hour or the piece, 
and the extra wear and tear of plant. This is the special cost 
which a manufacturer has in view, if he is calculating the 
lowest price at which it will be worth his while to accept an 
order, irrespectively of any effect that his action might have 
in spoiling the market for future orders, and trade being slack 
at the time. But in fact he must as a rule take account of 
this effect : the price at which it is just worth his while to 
produce, even when trade is slack, is in practice generally a 
good deal above this prime cost, as we shall see shortly '. 

1 " There are many systems of Prime Cost in vogue.. .we take Prime Cost to 
mean, as in fact the words imply, only the original or direct cost of produc- 
tion ; and while in some trades it may be a matter of convenience to include 
in the cost of production a proportion of indirect expenses, and a charge for 
depreciation on plant and buildings, in no case should it comprise interest on 
capital or profit." (Garcke and Fells, Factory Accounts, Ch. i.) 



§ 1. The present chapter is chiefly occupied with difficul- 
ties in the problem of value, resulting from differences between 
the immediate and the later effects of the same causes. In 
this case, as in others, the economist merely 

The term 
Normal is 

brings to light difficulties that are latent in the 

common discourse of life, so that by being frankly 
faced they may be thoroughly overcome. For in ordinary life 
it is customary to use the word Normal in different senses, 
with reference to different periods of time ; and to leave the 
context to explain the transition from one to another. The 
economist follows this practice of every-day life : but, by 
taking pains to indicate the transition, he sometimes seems 
to have created a complication which in fact he has only 

Thus, for instance, when it is said that the price of wool 
on a certain day was abnormally high though the average 
price for the year was abnormally low, that the wages of coal- 
miners were abnormally high in 1872 and abnormally low in 
1879, that the (real) wages of labour were abnormally high 
at the end of the fourteenth century and abnormally low in 
the middle of the sixteenth ; everyone understands that the 
scope of the term Normal is not the same in these various 
cases. Every (me takes the context as indicating the special 
use of the term in each several case; and a formal inter- 
pretation clause is seldom necessary, because in ordinary 



conversation misunderstandings can be nipped in the bud by 
question and answer. But let us look at this matter more 

We have noticed ' how a cloth manufacturer when calcu- 
lating the expenses of producing all the different 
things required for making cloth would need to "im\he'°" 
frame his estimates with reference to the amounts <=^°th trade, 
of each of them that would be wanted, and on the supposition 
m the first instance that the conditions of supply would be 
normal. But we have yet to take account of the fact that he 
must give to this term a wider or narrower range, according 
as he was looking more or less far ahead. ^ 

Thus in estimating the wages required to call forth an 
adequate supply of labour to work a certain class of looms, 
he might take the current wages of similar work in the 
neighbourhood : or he might argue that there was a scarcity 
of that particular class of labour in the neighbourhood, that 
Its current wages there were higher than in other parts of 
England, and that looking forward over several years so as to 
allow for immigration, he might take the normal rate of 
wages at a rather lower rate than that prevailing there at 
the time. Or lastly, he might think that the v.ages of 
weavers all over the country were abnormally low relatively 
to others of the same grade, in consequence of a too san-uine 
view having been taken of the prospects of the trade half a 
generation ago. He might argue that this branch of work 
was overcrowded, that parents had already begun to choose 
other trades for their children which offered greater net 
advantages and yet. were not more difficult; that in con- 
sequence a few years would see a falling-off in the supply 
of labour suited for his purpose ; so that looking forward a 
long time he must take normal wages at a rate rather hi<dier 
than the present average. ^ 

Again, in estimating the normal supply price of wool, he 

1 See above, CIi. iii. § 4. 

"• u 


BOOK V. CH. V. §§ 1, 1 

would take the average of several past years. He would 
make allowance for any change that would be likely to affect 
the supply in the immediate future ; and he would reckon for 
the effect of such droughts as from time to time occur in 
Australia and elsewhere ; since their occurrence is too common 
to be regarded as abnormal. But he would not allow here 
for the chance of our being involved in a great war, by which 
the Australian supplies might be cut off; he would consider 
that any allowance for this should come under the head of 
extraordinary trade risks, and not enter into his estimate of 
the normal supply price of wool. 

He would deal in the same way with the risk of civil 
tumult or any violent and long-continued disturbance of the 
labour market of an unusual character ; but in his estimate 
of the amount of work that could be got out of the machinery, 
ifec, under normal conditions, he would probably reckon for 
minor interruptions from trade disputes such as are con- 
tinually occurring, and are therefore to be regarded as 
belonging to the regular course of events, that Is, as not 

In all these calculations he would not concern himself 
specially to inquire how far mankind are under the exclusive 
influence of selfish or self-regarding motives. He might be 
aware that anger and vanity, jealousy and offended dignity are 
stdl almost as common causes of strikes and lockouts, as the 
desire for pecuniary gain : but that would not enter into his 
calculations. All that he would want to know about them 
would be whether they acted with sufficient regularity for 
him to be able to make a reasonably good allowance for their 
influence in interrupting work and raising the normal supply 
price of the goods. 

In short, the practised business man simplifies his task by 
giving his attention to one set of difficulties at a time, making 
almost instinctively first one and then another provisional 
supposition to help him on liis way. 






§ 2. But though applications of the term Normal are thus 
elastic, and capable of being extended gradually 
from very short to very long periods ; yet these pe°riSf normaf 
periods may be divided roughly into two classes, p""^' 
In the first class there is time for the supply of those things 
which are used in producing the commodity (or in other 
words, its factors of production), to adapt itself to the 
demand ; in the second class there is not. 

For instance, on the day following a large catch of 
niJickerel the price in the market may settle 
down after a little manoeuvring at as many from fish°" 
pence as it had been at shillings on the previous "^^''^^ts. 
day; and this change will in no way depend on the normal 
cost of catching mackerel, it will be governed by the volume 
of the past catch, with perhaps some slight refer- oscillations of 
ence to the chance that a similar catch may be market price, 
had on the morrow. If we suppose the boat to be owned by 
a capitalist who pays the fisherman by the day, the net 
earnings of his boat for the day will be the excess of the 
price he gets for his fish over his outlay for wages and stores, 
together with allowance for the injury done to the boat and 
net by the day's work. 

For that particular day this excess may be either more or 
less than the normal supply price required to make it worth 
his while to provide the boat and its equipment and the 
business organization needed for managing it and selling its 
catch. But if, in the long run and on the average, it is more 
than this normal supply price, capital will drift into the 
fishing trade; if less, it will drift out; that is to say, old boats 
and nets, when worn out, will seldom be replaced. And 
therefore, if the general conditions of the fishing trade are 
stationaiy, the earnings of the boat will oscillate about this 
normal supply price. 

But next suppose there to be great increase in the general 
demand for fish, such for instance as might arise from the 





*> S 4 

->> o, t. 

spreading of a disease through all kinds of fami stock simul- 

OsciUations of ^^^^^"^^7' ^ ^^i^h meat was made a dear and 

normal supply dangerous food. The increased demand for fish 

perils"' ^^°'^ ^*^"}^ "«t ^ell ^e met without bringing into the 

fishing trade some people from outside, who were 

not fitted by training to do its work well, and to whom many 

of its ordinary incidents would prove great hardships. Old and 

unsuitable boats would be pressed into the service ; while the 

better class of boats would earn an excess above the expenses 

of working them, that would amount in a year perhaps to 

fifty per cent, or more on their total cost ; and able fishermen, 

whether paid by shares or by the day, might for a time get 

twice their ordinary wages. Thus the normal price of fish 

would be higher than before. Variations in the catch of fish 

from day to day might make the market price oscillate at 

least as violently as before about tliis normal level for an 

increased amount, but this level would rise rapidly with every 

such increase of demand. 

Of course these high prices would tend to bring capital 
and labour into the trade : but if it were expected that the 
disease among live stock would not last very long, and that 
therefore the unusual demand for fish would die away in a 
few years, people would be cautious about investing capital 
and skill in a trade that was in danger of being glutted. And 
therefore, though when the demand slackened off; the price 
would fall to, and probably below its old level ; yet so long 
as the demand was fully maintained the price would keep up. 
And here we see an illustration of the almost universal law 
that the term Normal, being taken to refer to a short period 
of time, the normal supply price is likely to be raised by an 
increase in demand. 

§ 3. But if we turn to consider the normal supply price 
with reference to a long period of time, we shall find that it is 
Normal value governed by a different set of causes, and with 
in relation to different results. For suppose that the disuse of 

long periods. , * , . 

meat causes a j>ermanent distaste for it. and that 




an increased demand for fish continues long enough to enable 
the forces by which its supply is governed to work out their 
action fully. The source of supply in the sea might perhaps 
show signs of exhaustion, and the fishermen might have to 
resort to more distant coasts and to deeper waters. Nature 
giving a Diminishing Return to the increased apolication of 
capital and labour of a given order of efficiency. On the other 
hand, those might turn out to be right who think that man is 
responsible for but a very small part of the destruction of fish 
that is constantly going on ; and in that case a boat starting 
with equally good appliances and an equally efficient crew 
would be likely to get nearly as good a haul after the increase 
in the total volume of the fishing trade as before. In any 
case the normal cost of equipping a good boat with an efficient 
crew would certainly not be higher, and probably be a little 
lower after the trade had settled down to its now increased 
dimensions than before. For since fishermen require only 
trained aptitudes, and not any exceptional natural qualities 
their number could be increased in less than a generation to 
almost any extent that was necessary to meet the demand • 
while the industries connected with building boats, makin<^ 
nets, &c. being now on a larger scale would be organized more 
thoroughly and economically. If therefore the waters of the 
sea showed no signs of depletion of fish, an increased supply 
could be produced at a lower price after a time sufficiently 
lr>ng to enable the normal action of economic causes to work 
Itself out : and, the term Normal being taken to refer to a 
long period of time, the normal price of fish would decrease 
with an increase in demand. 

§4. To sum up first as regards short periods. The supply 
of specialized skill and ability, of suitable machinery and 
other material capital, and of the appropriate 
industrial organization, has not time to be fully dus^niirto 
adapted to demand ; but the producers have to ^^""^ periods, 
adjust their supply to the demand as best they can with the 



BOOK V. (^TT. V. §5 4, 


appliances already at their disposal. On the one hand there 
is not time materially to increase those appliances if the supply 
of them is deficient ; and on the other, if the supply is exces- 
sive, some of them must remain imperfectly employed, since 
there is not time for the supply to be much reduced by gradual 
decay, and by conversion to other uses. The particular income 
derived from them does not for the time affect perceptibly the 
supply ; and does not directly affect the price of the commodi- 
ties produced by them. It is a surplus of total receipts over 
prime cost ; but unless it is sufficient to cover in the long run 
a fair share of the general costs of the business, produ^ction 
will gradually fall off^ 

Next to sum up as to long periods. In them all invest- 
ments of capital and effort in providing the material plant 
and the organization of a business, and in 
acquiring trade knowledge and specialized ability, *"**. *^ *° ^°"e 
have time to be adjusted to the incomes which ^^"°'*^* 
are expected to be earned by them : and the estimates of 
tliose incomes therefore directly govern supply, and are the 
true long-period nonnal supply price of the commodities pro- 
duced. A great part of the capital invested in a business is 
generally spent on building up its internal organization and 
its external trade connections. If the business does not 
prosper all this capital is lost, even though its material plant 
may realize a considerable part of its original cost. And 
anyone proposing to start a new business in any trade must 
reckon for the chance of this loss. If himself a man of 
normal capacity for that class of work, he may look forward 
ere long to his business being a representative one, in the 
sense in which we have used this t^rm, with its fair share of 
the economies of production on a large scale. If the net 
earnings of such a representative business seem likely to be 
greater than he could get by similar investments in other 

1 Thus it has sometliing of tlie nature of a rent. Compare below, Cli vui 
S 1, and Appendix D. * , . . 





trades to which he has access, he will choose this trade. Thus 
that investment of capital in a trade, on which the price of 
the commodity produced by it depends in the long run, is 
governed by estimates on the one hand of the outgoings 
required to build up and to work a representative firm, and on 
the other of the incomings, spread over a long period of time, 
to be got by such a price. 

§ 5. To go over the ground in another way. Market 
values are governed by the relation of demand to stocks 
actually in the market; with more or less reference to 
'future* supplies, and not without some influence of trade 
combinations. But the current supply is in 
itself the result of the action of producers in T^!^^""^^ 

^ drift of the 

the past ; this action has been mainly deter- term Normal 
mined by their comparing the prices which they is"th^ same for 
expect to get for their goods with the expenses ^^°.'"' ^"^ *°"e 
to which they will be put in producing them. 
The range of expenses of w Inch they take account will depend 
on whether they are merely considering the extra expenses of 
certain extra production with their existing plant, or are 
considering whether to lay down new plant for the purpose. 
But in any case it will be the general rule that that portion 
of the supply which can be most easily produced will be pro- 
duced, unless the price is expected to be very low. Every 
increase in the price expected will, as a rule, induce some 
people who would not otherwise have produced anything, to 
produce a little; while those who liave produced something 
for the lower price, will jjrobably produce more for the higher 

The general drift of the term Normal KSupply Price is 
always the same whether the period to which it refers is short 
or long; but there are great differences in detail. In every 
case it means the price the expectation of which is sufficient 
and only just sufficient to make it worth w^hile for people to 
produce a certain aggregate amount yearly : in every case it 




5, G. 

is the marginal cost of production ; that is, it is the cost of 
production of those goods which are on the margin of not 
being produced at all, and which would not be produced if the 
price to be got for them were expected to be at all lower. 
But the causes which determine this margin vary with tlie 
length of the period under consideration. 

§ 6. Of course there is no hard and sharp line of division 
There is no between "long" and "short" periods. Nature 
bet'weelittg" ^'^^ ^^^^^ ^^ ^uch lines in the economic condi- 

perloi's^'^ ^'"'''^ ""^ ^"'^''^^ ^'^^ ^ ^'^'^ ^"^ ^^^^^^^g with practical 

problems they are not wanted. Just as we con- 
trast civilized with uncivilized races, and establish many 
general propositions about either group, though no hard and 
fast division can be drawn between the two; so we contrast 
long and short periods without attempting any rigid demarca- 
tion between them. But four classes stand out. In each, price 
Classification '^ governed by tlie relations between demand and 
of problems of Supply. But as regards market prices, Sunnlv is 

value by the xi • ,-, , *^ ' I r j ^'^ 

periods to ^f^Ken to mean the stock of the commodity in 

wjuch they question which is on hand, or at all events « in 
sight." As regards norinal prices, when the term 
Normal is taken to relate to short periods of a few months or 
a year, Supply means broadly what can be produced for the 
price in question with the existing stock of plant, personal 
and impersonal, in the given time. As regards normal prices 
when the term Normal is to refer to long periods of several 
years, Sui)ply means what can be produced by plant, which 
Itself can be remuneratively produced and applied within the 
given time ; while lastly, there are very gradual or Secular 
movements of normal price, caused by the gradual growth of 
knowledge, of population and of capital, and the changin- 
conditions of demand and supply from one generation to 

^ The remainder of the present volume is chiefly concerned 
with the third of the above classes. That is, it discusses the 





normal relations of wages, profits, prices, ckc, for long periods 
of several years. But occasionally account has to be taken of 
gradual changes; and one chapter, Book VI. Ch. xii., is given 
up to "The Influence of Progress on Value," that is, to the 
study of very gradual, or secular, changes of value. 

On the other hand the first two classes will come into 
prominence when we discuss, in the second volume, fluctua- 
tions of prices and wages arising from quickly passing changes 
in the state of commercial credit, and other causes. And the 
chapter on " Trade Unions " at the end of the present volume 
is partly concerned with these two classes. 






§ 1. Thk demand for the things used for making other 
Derived de- things, and their factors of production, is in- 
mand and joint direct; it is derived from the demand for the 

demand. ., . . ""^ 

things towards the production of which they 
contribute; or, in other words, the demands for all the 
various factoi-s of production of a finislied commodity are 
joined together in the joint demand for it. Thus the demand 
for beer is direct, and is a joint demand for hops, malt, 
brewers' labour, and the other factors of production of beer : 
and the demand for any one of them is an indirect demand 
derived from that for beer. Again there is a direct demand 
for new houses ; and from this there arises a joint demand for 
the labour of all the various building trades, and for bricks, 
stone, wood, etc., which are factors of production of building 
work of all kinds, or as we may say for shortness, of new 
houses. But the demand for any one of these, as for instance 
the labour of plasterers, is only an indirect, or Derived, 

Let us take an illustration from a class of events that 
are of frequent occurrence in the labour market ; 
and suppose that the supply and demand for 
building being in equilibrium, there is a strike 
on the part of one group of workers, say the 
plasterers, or that there is some other disturbance to the 
supply of plasterers' labour. In order to make a separate 

taken from a 
labour dispute 
in the build- 
ing trade. 

mi . 



study of the demand for that factor, we suppose firstly 
that the general conditions of the demand for new houses 
remain unchanged (that is, that the demand schedule for 
new houses remains valid); and secondly we assume that 
there is no change in the general conditions of supply of 
the other factors, two of which are of course the business 
faculties and the business organizations of the master builders 
(that is, we assume that their supply schedules also remain 
valid). Then a temporary check to the supply of plasterers' 
labour will cause a proportionate check to the amount of 
building: the demand price for the diminished number of 
houses will be a little higher than before; and the supply 
prices for the other factors of production will not be greater 
than before. Thus new houses can now be sold at prices which 
exceed by a good margin the sum of the prices at which these 
other requisites for the production of houses can be bought ; 
and that margin gives the limit to the possible rise of the price 
that will be offered for plasterers' labour, and on the supposition 
that plasterers' labour is indispensable ^ 

§ 2. It is however important to remember that if the 
supply of one factor is disturbed, the supply of others is likely 
' to be disturbed also. In particular, when the factor of which 
the supply is disturbed is one class of labour, as that of the 
plasterers, the employers' earnings generally act as a bufier. 
That is to say, the loss falls in the fii-st instance on them ; 
but by discharging some of their workmen and lowering the 
wages of others, they ultimately distribute a great part of it 
among the other factors of production. 

We may note the general conditions, under which a check 

1 The different amounts of this margin, corresponding to different checks 
to the supply of plasterers' labour, are detennined by the general nile that, — 

The demand price for any thing used in producing a commwlity is, for each 
separate amount of the commo<lity, limited by the excess of the price at which 
that amount of the commodity can find purchasers, over the sum of the prices 
at which the corresponding supplies of the other things needed for making it 
will be forthcoming. 

This and several other results of the present chapter can be most clearly 
apprehended by the aid of diagrams. See Pnncipltti V. vi. 



BOOK V. CH. VT. SS 2, 3. 

to the supply of a thing that is wanted not for direct use, 
Conditions but as a factor of pnKluction, may cause a verv 

under which ^ j. • • -^ . „,, ^ 

a check to S^^^^ ^'ise m Its pnce. The first condition is 

"S^J^uclfthe **'^* *^^ ^^^*^" '^'^^^ should be essential, or 
price of a factor nearly essential to the production of the com- 
of production, ^odity, no good Substitute being available at a 
moderate price. 

The second condition is that the commodity in the pro- 
duction of which it is a necessary factor, should be one for 
which the demand is stiff and inelastic ; so that a check to 
its supply will cause consumers to offer a much increased 
price for it rather than go without it ; and this of course 
includes the condition that no good substitutes for the com- 
modity are available at a price but little higher than its 
equilibrium price. If the check to house building raises the 
pnce of houses veiy much, builders, anxious to secure the 
exceptional profits, will bid against one another for such 
plasterers' labour as there is in the market. 

The third condition is that only a small part of the 
expenses of production of the commodity should consist of 
the price of this factor. Since the plasterers' wages are l)ut 
a small part of the total expenses of building a house, a rise 
of even 50 per cent, in them would add but a very small 
percentage to the expenses of production of a house and would 
check demand but little. 

The fourth condition is that even a small check to the 
amount demanded should cause a considerable fall in the 
supply prices of other factors of production; for that will 
increase the margin available for paying a high price for this 
one. If, for instance, bricklayers and other classes of work- 
men, or the employers themselves cannot easily find other 
things to do, and cannot afibrd to remain idle, they may be 
willing to work for much lower earnings than before, and this 
will increase the margin available for paying higher wages to 



The rise in plasterers' wages would be checked if it were 
possible either to avoid the use of plaster, or to 
get the work done tolerably weU and at a mode- J^fl^ence of 
rate price by people outside the plasterers' trade, the Law of 
The Law of Substitution here as elsewhere " ^ * "**°"' 
exercises a subduing influence on forces which might otherwise 
lead to startling results. The tyranny which one factor of 
prodiuition of a commodity might in some cases exercise over 
^^L-?*?^^?^^^'*^ ^h^ough the Law of Derived Demand is 
tempered by the Law of Substitution. 

The relations between plasterers, bricklayers, <kc. are 
representative of much that is both instructive and romantic 
in the history of alliances and conflicts between trades unions 
in allied trades. But the most numerous instances of Joint 
demand are those of the demand for a raw material and the 
operatives who work it up ; as for instance cotton or jute or 
iron or copper, and those who work up these several materials. 
Again, the relative prices of different articles of food vary a 
good deal with the supply of skilled cooks' lalx)ur ; thus for 
instance many kinds of meat and many parts of vegetables 
which are almost valueless in America, where skilled cooks 
are rare and expensive, have a good value in France where the 
art of cooking is widely diffused. 

§ 3. We have already ' noticed how the demand for any 
commodity is made up or compounded of the composite 
demands of the different individuals who may demand, 
need it. But we now may extend this notion of composite 
demartd to factors of production. Nearly eveiy raw material 
and nearly every kind of labour is applied in many different 
branches of industry, and contributes to the production of a 
great variety of commodities ; and the total demand for it is 
the sum of the derived demands for it, in each of these several 

1 See Book iii. Ch. m., iv. 




BOOK V. CH. VI. §§ 4, 5. 

Jcint Supply. 

§ 4. We may now pass to consider the case of joint pro- 
ducts : i.e. of things which cannot easily be pro- 
duced separately; but are joined in a common 
origin, such as gas and coke, or beef and hides, or wheat and 
straw. As there is a joint demand for things joined in a 
common destination, so there is a joint supply of things which 
have a common origin. The single supply of the common 
origin is split up into the various derived supplies of the 
things that proceed from it. 

The prices of the gas and the coke, the joint products 
that are got from a ton of coal, must together be enough 
to cover their joint expenses of production. If the demand 
for gas rises, more coke will be produced, and its price 
must fall, so that the increased supply may be taken off 
the market. The rise in the price of gas must be sufficient to 
cover this fall in the price of coke, and also to cover the 
increase, if there is any, in the joint expenses of production of 
gas and coke. Again, since the repeal of the Com Laws much 
of the wheat consumed in England has been imported, of 
course without any straw. This has caused a scarcity and a 
consequent rise in the price of straw, and the farmer who 
grows wheat looks to the straw for a great part of the value of 
the crop. The value of straw then is high in countries which 
import wheat, and low in those which export wheat. In the 
same way the price of mutton in the wool-producing districts 
of Australia was at one time very low. The wool was ex- 
ported, the meat had to be consumed at home ; and as there 
was no great demand for it, the price of the wool had to 
defray almost the whole of the joint expenses of production of 
the wool and the meat. Afterwards the low price of meat 
gave a stimulus to the trade of preserving meat for exporta- 
tion, and now its price in Australia is higher. 

There are very few cases of joint products the cost of pro- 
duction of both of which together is exactly the same as that 

i , 


of one of them alone. So long as any product'of a business has 
a market value, it is almost sure to have devoted to it some 
special care and expense, which would be dimin- r^^^ propor- 
ished, or dispensed with if the demand for that tions of joint 
product were to fall very much. Thus, for instance, generally be 
if straw were valueless, farmers would exert them- "modified, 
selves more than they do to make the ear bear as large a 
proportion as possible to the stalk. Again, the importation 
of foreign wool has caused English sheep to be adapted by 
judicious crossing and selection so as to develop heavy weights 
of good meat at an early age, even at the expense of some 
deterioration of their wool. It is only when one of two 
things produced by the same process is valueless, unsaleable, 
and yet does not involve any expense for its removal, that 
there is no inducement to attempt to alter its amount. 

§ 5. We may pass to the problem of composite supply^ 
which is analogous to that of composite demand, composite 
When a thing has several .sources of production, ^"PP^y* 
its total supply is made up, or compounded, of the supplies 
from all the several sources ; and these supplies are rival and 
competitive to one another. Each is likely to be applied in 
"substitution" for the others: for the principle of substitu- 
tion leads every business man to select those means to his end 
that are most efficient in proportion to their cost; unless 
indeed he is negligent, or has some independent reason for 
preferring the more costly one. 

If the causes which govern the production of two of these 
rivals are nearly the same, they may for many purposes be 
treated as one commodity. For instance, beef and mutton 
may be treated as varieties of one commodity for many pur- 
poses ; but they must be treated as separate for others, as for 
instance for those in which the question of the supply of wool 

Kival things are however often not finished commodities, 



5, 6. 

but factors of production : for instance, there are many rival 
fibres which are used in making ordinaiy printing paper. We 
have just noticed how the fierce action of derived demand for 
one of several complementary supplies, as e.g. for the supply 
of plasterers' labour, was liable to be moderated, when the 
demand was met by the competitive supply of a rival thing 
which could be " substituted " for it. 

§ 6. All the four chief problems, which have been dis- 
cussed in this chapter, have some bearing on the causes that 
govern the value of almost every commodity: and many of 
the most important cross connections between the values of 
different commodities are not obvious at first sight. 

Thus when charcoal was generally used in making iron, 
the price of leather depended in some measure on 
that of iron ; and the tanners petitioned for the 
exclusion of foreign iron in order that the demand 
on the part of English iron smelters for oak 
charcoal might cause the production of English 
oak to bo kept up, and thus prevent oak bark from becoming 

Again, the development of railways and other means of 
communication for the benefit of one trade, as for instance for 
wheat growing in some parts of America and for silver mining in 
others, greatly lowers some of the chief expenses of production 
of nearly every other product of those districts. Again, the 
prices of soda, and bleaching materials, and other products of 
industries the chief raw material of which is salt, move up 
and down relatively to one another with almost every im- 
provement in the various processes which are used in those 
industries. And every change in those prices affects the prices 
of many other goods ; for the various products of the salt 
industries are more or less important factors in many branches 
of manufacture. 

Again, cotton and cotton-seed oil are joint products, and 

Instances of 
intricate rela- 
tions between 
the values of 


the recent fall in the price of cotton is largely due to the im- 
proved manufacture and uses of cotton-seed oil : and further, 
as the history of tlie cotton famine shows, the price of cotton 
largely affects that of wool, Hnen and other things of its own 






§ 1. We may now return to the consideration of Prime 

and Supplementary Costs, with special reference 

tothejointVo- ^^ *^® proper distribution of the latter between 

ducts of the the Joint products of a business. For instance 

same business. , i , . , . , 

the shipowner has to apportion the expenses of 
his ship between heavy goods and goods that are bulky but 
not heavy. He tries, as far as may be, to get a mixed cargo 
of both kinds ; and an important element in the struggle for 
existence of rival ports is the disadvantage under which those 
ports lie which are able to offer a cargo only of bulky or only 
of heavy goods : while a port whose chief exports are weighty 
but not bulky, attracts to its neighbourhood industries which 
make for export goods that can be shipped from it at low 

From the expenses of transport we pass easily to those of 

Difficulties as '"^^'k^^i^^g- Some kinds of goods are easily mar- 
to the expenses keted ; there is a steady demand for them, and 
e ing. .^ .^ always safe to make them for stock. But 
for that very reason competition cuts their price "very fine," 
and does not allow a large margin above the direct cost of 
making them. Sometimes the tasks of making and selling 
them can be rendered almost automatic, so as to require very 
little to be charged on their account under the heads of the 
expenses of management and marketing. But in practice it is 


not uncommon to charge such goods with even less than the 
small share that would properly fall to them, and to use them 
as a means of obtaining and maintaining a business connection, 
that will facilitate the marketing of other classes of goods, the 
production of which cannot so well be reduced to routine ; for 
as to these there is not so close a competition. Manufacturers, 
especially in trades connected with furniture and dress, and 
retailers in almost all trades, frequently find it best to use 
certain of their goods as a means of advertising others, and to 
charge the first with less and the second with more than their 
proportionate share of Supplementary expenses. In the former 
class they put those goods which are so uniform in character 
and so largely consumed that nearly all purchasers know their 
value well, in the second those with regard to which pur- 
chasers think more of consulting their fancy than of buyin<^ 
at the lowest possible price. 

Economic progress is constantly offering new facilities for 
marketing goods at a distance: it not only lowers Local facilities 
cost of carriage, but what is often more import- ^°'^ marketing, 
ant, it enables producers and consumers in distant places to 
get in touch with one another. In spite of this, the advan- 
tages of the producer who lives on the spot are very great in 
many trades; they often enable him to hold his own against 
competitors at a distance whose methods of production are 
more economical. He can sell in his own neighbourliood as 
cheaply as they can, because though the cost of making is 
greater for his goods than for theirs, he escapes much of the 
cost which they incur for marketing. But time is on the 
side of the more economic methods of production; and his 
distant competitors will gradually get a stronger footing in 
the place, unless he or some new man adopts their improved 

A great part of these expenses of marketing results from 
the risk that a thing preparing for a certain market will not 
find the expected sale there. But it still remains to make a 



BOOK V. CH. VII. § 2. 

closer study of the relation in which Insurance against the 
risks of a business stands to the supply price of any particular 
commodity produced in it. 

§ 2. The manufacturer and the trader commonly insure 
Insurance against injury by fire and loss at sea; and the 
against nsk. premiums which they pay are among the general 
expenses, a share of which has to be added to the Prime cost 
in order to determine the Total cost of their goods. But the 
greater pai-t of business risks are so inseparably connected 
with the general management of the business that an insu- 
rance company which undertook them would really make itself 
responsible for the business : and in consequence every firm 
has to act as its own insurance ofiice with regard to them. 
The charges to which it is put under this head are part of its 
general expenses, and a share of them has to be added to the 
Prime cost of each of its products. 

But there is a danger of allowing for these risks more than 
once. When a farmer has calculated the expenses of raising 
any particular crop with reference to an average year, he 
must not count in addition insurance against the risk that 
the season may be bad, and the crop a failure : for in taking 
an average year, he has already set off the chances of 
exceptionally good and bad seasons against one another. 
When the earnings of a ferryman have been calculated on the 
avei-age of a year, allowance has already been made for the 
risk that he may sometimes have to cross the stream with an 
empty boat. 

When a manufacturer has taken the average of his sales 
of dress materials over a long time, and based his future 
action on the results of his past experience, he has already 
allowed for the risks that the machinery will be depreciated 
by new inventions that will render it nearly obsolete and that 
liis goods will be depreciated by changes in fashion. If he 
were to allow separately for insurance against these risks, he 
would be counting the same thing twice over. ♦ 



% # 

This discussion of the risks of trade has again brought 
before us tlie fact that the value of a thing, though it tends 
to equal its nomial (money) cost of production, does not 
coincide with it at any particular time, save by accident. 
The value in use of a bell with a flaw in it is very little ; it 
can be used only as old metal and therefore its price is only 
that of the old metal in it. When it was beins: cast the 
same trouble and expense were incurred for it as for other 
bells which turned out sound. Its Expenses of production ' 
were the same as those of sound bells : but they have great 
value in use and are therefore sold at a high price. The price 
of each particular bell is limited by its value in use : what 
the Law of Normal Yalue states is that the price of cracked 
bells and sound bells together must in the long run cover the 
expenses of making bells. 




§ 1. We are now at the end of that part of the general 
theory of value which can be presented in an easy form. But 
a word or two may be said here as to the general drift of a 
few doctrines, the investigation of which belongs to an ad- 
vanced course of study. 

In Appendix D it fe shortly argued that the so-called 
" rent " of a house, after deducting for the value 
of the land on which it is built, is really profits 
on capital invested in building: but that such profits, and 
also the profits earned by machinery and other appliances for 
production, have something in them of the nature of rent ; 
and that when short periods of time are under consideration 
they may properly be regarded as Qitasi-rents. 

The average income earned by the machinery in normal 
times is pretty sure to be about enough to give a moderate 
return of net profits. Eor if it gave but a very poor profit, 
capital would leave the trade ; and if it gave a veiy high profit, 
capital would flow into the trade, and by its competition 
bring the rate of profits down to the normal level. But this 
argument assumes that the trade is open. It is not applicable 
to a monopoly, 

§ 2. A monopolist may be, and often is, influenced by 
many other motives than the immediate desire 

Monopolies. - . t-» ^ • f i . 

tor gain. But in so far as he is governed by this 

motive, he will endeavour to keep the price of his commodity 




at the level which will give him the greatest net revenue. If, 
for instance, a steam- ferry company with a practical monopoly 
of a short cut between a town and its suburb could get 2,000 
passengers weekly at a fare of 3c/., 4,000 at 2c/., or 10,000 at 
Id. ; and if it calculated that its working expenses would be 
at the rate of 2d. for the first number, IJfl?. for the second, 
and fc/. for the third, it would be likely to fix the fare at 2d. 
For the figures would stand thus : 


Cost per 


















It would thus get a higher revenue with a fare of 2c/., 
than with either 3c/. or Id. 

If, however, it could be induced to lower its fare to Ic/., 
the 4,000 people who had paid the 2d. would gain 4,000c/. net : 
and the 6,000 people who would walk round rather than pay 
2d. J but would pay Id. rather than walk, would also derive a 
benefit from the change. If we put the aggregate value of 
this benefit to them at 2,000c/., we find that a change which 
took but 500c/. from the net income of the ferry company 
would confer 6,000c/. worth of benefit, or consumers* surplus 
as we have called it, on the public. This case illustrates the 
starting point of many interesting problems \ 

§ 3. The striking features of the case of the ferry are 
derived from the fact that a great number of indirect 
passengers can be carried at a lower cost per "^V^^? °^ 
head to the company than a small number. And demand, 
it may be observed that in any branch of prcduction which is 
free from monopoly and in which this rule holds (or in tech- 
nical terms which shows a tendency to Increasing Return), an 

1 The practical applications of such lines 6f reasoning belong to a later 
stage of economic study: but their leading outlines are shown by aid of 
diagrams in Pmiciples^ V. xiii. 


BOOK V. CH. VIII. 5 3. 

increased demand is sure to be followed by a fall in supply- 
price under the direct influence of competition ; and thus 
every additional purchaser confers a benefit on others. Books, 
for instance are made cheaper, to the benefit of all concerned, 
by an increase in the demand for them. But oats are made 
dearer by an increase in the demand for them. If rich men 
kept many superfluous horses, they would make food dearer. 
If instead they bought many books, tliey would enable other 
people to buy more books for a given outlay than before. 
This case also points to many interesting problems^, 

1 The leading outlines of some of these are shown by aid of diagrams in 
PnncqAeSj Y. xi. and xii. 










§ 1. The keynote of this Book is in the fact that free 
human beings are not brought up to their work on the same 
principles as a machine, a horse, or a slave. If they were 
there would be very little difference between the j^^.^^ ^^ 
distribution and the exchange side of value ; for Book vi. 
then the return to each agent of production would ^^ ^ ^ ° ^• 
only just suffice on the average to cover its expenses of 
production with wear and tear, etc. : — on the average ; i.a. 
after allowance had been made for casual failures to adjust 
supply to demand. But as it is, our growing power over nature 
makes her yield an ever larger surplus above necessaries ; and, 
though this might be absorbed by a very rapid increase of 
population, yet in fact population in a modern civilized 
country does not increase rapidly up to the means of subsist- 
ence; and all save the poorest do in fact enjoy a growing 
surplus above mere necessaries. There remain therefore the 
questions: — What are the general causes which govern the 
distribution of this surplus among the peopled What part 
is played by conventional necessaries, i.e. the Standard of 


BOOK VI. CH. T. §§ 1, 2. 

Comfort? What by the influence wliich methods of con- 
sumption and habits of life exert on efficiency; by wants 
in relation to activities, i.e. by the Standard of Life? What 
by the many-sided action of the principle of substitution, 
and by tlie struggle for survival between hand-workers and 
brain- workers of different classes and grades? What by the 
power which the use of capital gives to those in whose hands 
it is ? What share of the general flow is turned to remune- 
rate those who work and "wait," as contrasted with those 
who work and consume at once the fruits of their endeavours? 
An attempt is made to give a broad answer to these and 
some similar questions. 

The problem of distribution is difficult : no solution of it. 
The problem which is simple, can be true. Closer study has 
s^mTe*' shown that what professed to be easy answers 

illustrations to it, Were really partial answers to imaginary 
questions that might have arisen in otlier 
worlds than ours in which the conditions of life were 
very simple'. But yet the work done in answering these 
questions was not wasted: for a very difficult problem can 
best be solved by being broken up into pieces ; and each of 
these simple questions cont;iined a part of the great and 
difficult problem which we have to solve. Let us profit by 
this experience and work our way by successive steps. 

§ 2. Let us begin by studying the influence of demand on 
the earnings of labour, drawn from an imaginary 
world in which everyone owns the capital that 
aids him in his labour; so that the problem of 
the relations of capital and labour does not arise 
in it. That is, let us suppose that but little capital 
is used ; while everyone owns whatever capital he 
does use, and the gifts of nature are so abundant that they are 
free and unappropriated. Let us suppose, further, that everyone 
is not only of equal capacity, but of equal willingness to work, 

1 Compare Appendix E. § 1. 

First, all 
equal and 
able: popula- 
tion station- 



and does in fact work equally hard : also that all work is un- 
skilled, — or rather unspecialized in this sense, that if any two 
people were to change occupations, each would do as much and 
as good work as the other had done. Lastly, let us suppose that 
everyone produces things ready for sale without aid, and that 
he himself disposes of them to their ultimate consumers : so 
that the demand for everything is direct. 

In this case the problem of value is very simple. Things 
exchange for one another in proportion to the labour spent 
in producing them. If any one thing runs short in supply, 
it may for a short time sell for more than its normal price : 
it may exchange for things the production of which had 
required more labour than it had ; but, if so, people will 
at once leave other work to produce it, and in a very short 
time its value will fall to the normal level. Therefore, though 
there may be slight temporary disturbances, yet as a rule 
everyone's earnings will be equal to those of everyone else. In 
other words, each will have an equal share in the net sum 
total of things and services produced ; or, as we may say, 
the real National Income or Dividend. This will constitute 
the demand for labour; and may ))e called the common 
Wages-Fund or Earnings-Fund, or better still Earnings- 
stream ; since a Fund fails to suggest the constant flow of 
new gcK)ds into the world through supply, which flow out 
again through demand and consumption. 

If a new invention should double the efficiency of work in 
any trade, so that a man can make twice as many things of a 
certain kind in a year without requiring additional appliances, 
then those things will fall to half their old exchange value. 
The effective demand for everyone's labour will be a little 
increased ; and the share which he can draw from the common 
earnings-stream will be a little larger than before. He may if 
he chooses takp twice as many things of this particular kind, 
together with his old allowance of other things : or he may 
take somewhat more than before of everything. If there be an 



BOOK VT. on. I. §§ 2, 3, 4. 

increase in the efficiency of production in many trades, the 
common earnings-stream or dividend will be considerably 
larger; the commodities produced by those trades will be 
given more largely in exchange for those produced by other 
tra^les ; and this will of course increase the purchasing power 
of everyone's earnings. 

§ 3. Nor will the position be greatly changed if we 
suppose that some specialized skill is required in each trade, 
provided other things remain as before : that is, provided the 
workers are still supposed to be all of equal capacity and 
Next sup. industry, and all trades to be equally ao'reeable 

pose that j n ^ ■, ^ J o 

each has his and equally easy to be learnt. The normal rate 
own trade. of earnings will still be the same in all trades; 
for if a day's labour in one trade produces things that sell for 
more than a day's labour in others, and this inequality shows 
any signs of lasting, people will bring up their children by pre- 
ference to the favoured trade. The productive power of the 
community will have been increased by the division of labour; 
the common National Dividend or Earnings-stream will be 
larger; and as, putting aside passing disturbances, all will 
share alike in it, each will be able to buy with the fruits of 
his own la]x)ur things more serviceable to him than he could 
have produced for himself. 

In this stage, as in those considered before, it is still true 
that the value of each thing corresponds closely to the amount 
of labour spent upon it ; and that the earnings of everyone 
are governed simply by the bounty of nature and the progress 
of the arts of production. 

§ 4. Next, let us look at the influence of changes in the 
Next, allow ^u^i^ers of the population on their earnings \ We 
for a growth of are still supposing all labour to l^e of the same 
population. ^^^ . ^^ ^^^^^ ^g .^ ^^^ ^^^^ section, the normal 

rate of earnings will still be the same in all trades : because, 

1 It will be recollected that the reciprocal iiiflnence of earnings upon popu- 
lation IS to be reckoned with m the following chapter. The reasonings of this 


if a day's labour in one trade produced things that sold for 
more than a day's labour in others, and this inequality showed 
any signs of lasting, people would bring up their children by 
preference to the favoured trade. In this case then, as before, 
the national income will be divided out equally to each family, 
save for some slight passing inequalities ; and, therefore, every 
improvement in the arts of production or transport, every new 
discovery, every new victory over nature wiU increase equally 
the comforts and luxuries at the command of each family. 

But tliis case diflfers from the last; because in this case, 
the increase of population, if maintained long enough, must 
ultimately outgrow the improvements in the arts of production, 
and cause the law of diminishing return to assert itself 
in agriculture. That is to say, those who work on the land 
will get less wheat and other produce in return for their labour 
and capital. An hour's labour will represent a less quantity 
of wheat than before throughout the agricultural trades, and 
therefore throughout all other trades; since all labour is of 
the same grade, and earnings are therefore as a rule equal in 
all trades. 

Further we must note that the surplus or rental value of 
land will tend to rise. For the value of any kind of produce 
must equal that of the labour, aided on our supposition by a 
uniform quantity of capital throughout, which is required to 
produce it on the margin of cultivation \ More labour and 
capital than before will be needed to raise a quarter of 
wheat &c. on the margin ; and therefore the wheat &c., which 
is returned by nature to the labour applied under advan- 
tageous circumstances, will have a higher value relatively to 

section apply to any growth of population however caused, for instance to one 
caused by advance of medical science, and a consequent lessening of the death 

1 The marginal application of labour may be on land that will barely repay 
any labour at all; or it may be that cultivation of fertile land which is only 
just remunerative. See Book iv. Ch. iii. § 2. 




BOOK VI. CH. I. §§ 4, 5, 6. 

that labour and capital than before : or, in other words, it M-iU 
yield a larger surplus value over that of the labour and capital 
used m raising it. 

This surplus will go to the private owner of the land 
If there is one: though of course it might conceivably be 
appropriated to public uses : or conceivably everyone midit 
have an equal share of land. 

§ 5. Let us now drop the supposition that labour is so 
Next allow for '"obile as to ensure equal remuneration for equal 
differences in efforts, throughout the whole of society; and let 
us approach much nearer to the actual condition 
of life by supposing that labour is not all of one industrial 
grade, but of several. Let us suppose that parents always 
bring up their children to an occupation in their own grade • 
that they have a free choice within that grade, but not outside 
it. In the next chapter we shall have to consider what causes 
are likely to govern the increase of numbers in each grade • 
but whatever be those causes, it is clear that the share of each 
of the members of any grade, or other industrial compartment, 
will be the higher, the fewer the number of those members 
and the greater the need for their services on the part of the 
commumty and especially of rich j)eople. 

Suppose for instance artists to form a grade or caste by 
themselves; then their earnings will be governed, partly by 
their own numbers, partly by the resources which the popula- 
tion have available for spending on such gratifications as 
artists can supply for them, and partly by their desire for 
such gratifications. 

^ § 6. We may now leave the imaginary world, in which 

^aiHfe'bVt" r^'^ ''''^ '''^''' ^^^ ""^^'^^ *^^<^ »id« him in 
consider only *^*^ Work j and retum to our own, where the 
demand. relations of labour and capital play a great part 

in the problem of distribution; and where the action of eco- 
nomic forces is largely directed by a set of men who specialize 
themselves in the organization of business. 



It is cliiefly their agency in the modern world which 
justifies the common sayings of e very-day life, Principle of 
that "every thing tends to find its own level," ?"bstitution 

j^,. implied in the . 

that "most men earn just about what they are common say- 
worth," and "if one man can earn twice as much blfsi^neVs'"* 
as another, that shows that his work is worth everything 

, . 1 ,j , 1 , . finds Its own 

twice as much," that "machinery will displace level, 
manual labour whenever it can do the work cheaper." If 
there are two methods of obtaining the same result, one by 
skilled and the other by unskilled labour, that one will be 
adopted which is more efficient in proportion to its cost. 
There will be a margin on which either will be indifferently 
applied, and on that margin the efficiency of each will be in 
proportion to its cost. 

Again, there will be a rivalry between hand-power and 
machine-power sunilar to that between two different kinds 
of hand-power or two different kinds of machine-power. 
Thus hand-power has the advantage for some operations, as, 
for instance, for weeding out valuable crops that have an 
irregular growth ; horse-power in its turn has a clear advan- 
tage for weeding an ordinary turnip-field; and the applica- 
tion of each of them will be pushed till any further use of it 
would bring no net advantage. On the margin of indifference 
as between hand-power and horse-power their prices must be 
proportionate to their efficiency; and thus the principle of 
Substitution will have established a direct relation between 
the wages of labour and the price that has to be paid for 
horse-power \ 

I See above, Book v. Ch. iii. and rv. It will be remembered that, so far 
as the knowledge and business enterprise of the protlucers reach, they will iu 
each case choose those factors of production which are best for their purpose : 
the sum of the prices which they pay for those factors which are used is, as a 
rule, less than the sum of the prices which they would have to pay for any 
other set of factors which could be substituted for them: whenever it appears 
to the producers that this is not the case, they will, as a rule, set to work to 
substitute the less expensive method. The margin of profitableness is not to 
be regarded as a mere point on any one fixed line of possible investment ; but 
as a boundary line of irregular shape cuttmg one after another every possible 
line of investment. See especially pp. 195, 196, 205, 200. 


BOOK VT. CH. I. §§ 6, 7. 

As a rule many kinds of labour, of raw materia] of 
machinery and other plant, and of business organization both 
internal and external, go to the production of a commodity • 
and the advantages of economic freedom are never more 
stnkmgly manifest than when a business man endowed with 
genius IS trymg experiments, at his own risk, to see whether 
some new method, or combination of old methods, wiU be 
more efficient than the old. 

Every business man indeed is constantly endeavouring 
to obtam a notion of the relative efficiency of every agent of 
production that he employs ; a^ well as of others that might 
Net product. P""^"'^^^ ^ substituted for some of them. He 
estmiates as best he can how much net product 
will be caused by a certain extra use of any one agent. By 
net product is meant net addition to the total value of his 
product, after deducting for any extra expenses that may be 
indirectly caused by the change, and adding for any incidental 
savings. He endeavours to employ each agent up to that 
margin at which its net product would no longer exceed the 
price he would have to pay for it; he works generally by 
trained instinct rather than formal calculation; and it would 
be too long a task here to write out in slow reasonings the 
quick thoughts that pass through his mind. But all his 
reckonmgs are substantially similar to those which he 
makes^in the case in which he is in doubt whether he has 
enough labour to turn his stock, machinery and other trade 
appliances to good account; and whether he could not by 
hinng one more man, increase the production by more than 
the equivalent of his wages, without having to supply ad- 
ditional capital in any other way'. 

§ 7. So far we have considered chiefly the demand for 
labour. But it may be well to push a little further our 
Illustration of the nature of the demand for capital for any 
use; and to observe the way in which the aggregate demand 
for It IS made up of the demands for many different uses. 

1 Compare PnuciiAeH, VI. i. 8. 


To fix the ideas, let us take some particular trade, say 
that of hat-making, and inquire what determines m 

+U 1. c -.1^7,. lUustration of 

the amount ot capital which it absorbs. Sup- the demand for 
pose that the rate of interest is 3 per cent, per pS?ciiar^ 
annum on perfectly good security; and that the *'"^**«- 
hat-making trade absorbs a capital of one million pounds. 
This implies that there is a million pounds' worth of capital 
which the hat-making trade can turn to so good account that 
they would pay 3 per cent, per annum Tiet for the use of it 
rather than go without it. 

Some things are necessary to those engaged in the trade; 
they must have not only some food, clothing, and house-room, 
but also some Circulating capital, such as raw material, and 
some Fixed capital, such as tools and perhaps a little ma- 
chinery. And though competition prevents anything more 
than the ordinary trade profit being got by the use of this 
necessary capital ; yet the loss of it would be so injurious that 
those in the trade would have been willing to pay 50 per cent, 
on the capital, if they could not have got the use of it on 
easier terms. There may be other machinery which the trade 
would have refused to dispense with if the rate of interest had 
been 20 per cent, per annum, but not if it had been higher. 
If the rate had been 10 per cent., still more would have been 
used; if it had been 6 per cent., still more; if 4 per cent., 
still more; and finally the rate being 3 per cent, they use 
more still. When they have this amount, the marginal utility 
of the machinery, i.e. the utility of that machinery which 
it is only just worth their while to employ, is measured by 
3 per cent. 

A rise in the rate of interest would diminish their use 
of machinery ; for they would avoid the use of all that did 
not give a net annual surplus of more than 3 per cent, on its 
value. And a fall in the rate of interest would lead them to 
demand the aid of more capital, and to introduce machinery 
which gave a net annual surplus of something less than 3 per 





BOOK VI. CH. I. §§ 7, 8. 


cent, on its value. Again, the lower the rate of interest, the 
more substantial will be the style of building used for the 
hat-making factories and the homes of the hat-makers ; and 
a fall in the rate of interest will lead to the employment of 
more capital in the hat-making trade in the form of larger 
stocks of raw material, and of the finished commodity in the 
hands of retail dealers'. 

The methods in which capital will be applied may vary 
Variety in much even within the same trade. Each under- 
demand for taker having regard to his own means, will push 
capital. the investment of capital in his business in each 

several direction until what appears in his judgment to be the 
margin of profitableness is reached ; and that margin is, as we 
have said, a boundary line cutting one after another every 
possible line of investment, and moving irregularly outwards 
in all directions whenever there is a fall in the rate of interest 
at which extra capital can be obtained. Thus the demand for 
the loan of capital is the aggregate of the demands of all 
individuals in all trades ; and it obeys a law similar to that 
which holds for the sale of commodities ; just as there is a 
certain amount of a commodity which can find purchasers 
at any given price, and when the price rises the amount 
that can be sold diminishes, so it is with regard to the use 
of capital. 

And as with borrowings for productive purposes, so with 
those of spendthrifts or Governments who mortgage their future 
resources in order to obtain the means of immediate expendi- 
ture. It is true that their actions are often but little governed 
by cool calculation, and that they frequently decide how much 
they want to borrow with but little reference to the price they 
will have to pay for the loan ; but still the rate of interest 
exercises a perceptible influence on borrowings even of this 

1 On Jevons' doctrine of the " Advantage of Capital to Industry," see 
Prhici'ijles, Ed. in. p. 487. 

§ 8. To sura up the whole in a comprehensive, if diflicult, 
statement: — Every agent of production, land, provisional 
machinery, skilled labour, unskilled labour, <fec., conclusion, 
tends to be applied in production as far as it profitably can 
be. If employers, and other business men, think that they 
can get a better result by using a little more of any one agent 
they will do so. In this they do on a large scale just what we 
have seen the housewife doing on a small scale : they estimate 
the net product (that is the net increase of their total output 
after allowing for incidental expenses) that will be got by a 
little more outlay in this direction, or a little more outlay in 
that ; and if they can gain by shifting a little of their outlay 
from one direction to another, they do so'. 

Thus then the uses of each agent of production are 
governed by the general conditions of demand in Marginal 
relation to supply : that is, on the one hand by "ses do not 
the urgency of all the uses to which the agent varuJ" 
can be put, taken together with the means at ^"**^« ^ 

1 /. , governed 

the command of those who need it ; and, on the together 
other hand, by the available stocks of it. And Ty^^nr^"^ 
equality is maintained between its values for each conditions 

, . of demand 

use by the constant tendency to shift it from in relation 
uses, in which its services are of less value ^°^"PP^y- 

1 It may be well to compare step by step the case of the housewife, dis- 
tributing her wool between its various uses for direct domestic consumption, 
and the capitalist employers distributing the general resources of the com- 
munity in production, and for ease of comparison the opening paragraph of 
Book III. Ch. V. is reproduced here:— The primitive housewife finding that she 
has a limited number of hanks of yarn from the year's shearing, considers all 
the domestic wants for clothing and tries to distribute the yarn l)etween them 
in such a way as to contribute as much as possible to the family well-being. 
She will think she has failed if, when it is done, she has reason to regret that 
she did not apply more to makmg, say socks, and less to vests. That would 
mean that she had miscalculated the points at which to suspend the makmg 
of socks and vests respectively ; that she had gone too far in the case of vests, 
and not far enough in that of socks ; and that therefore at the points at which 
she actually did stop, the utiUty of yarn turned into socks was greater than 
that of yam turned into vests. But if, on the other hand, she hit on the 
right points to stop at, then she made just so many socks and vests that she 





BOOK VI. CH. I. § 8. 

to others in which they are of greater value, in accordance 
with the principle of substitution. 

If less use is made of unskilled labour or any agent, the 
reason will be that at some point at which people were on 
the margin of doubt whether it was worth while to use that 
agent, they have decided that it is not worth their while. 
That is what is meant by saying that we must watch the 
marginal uses, and the marginal efficiency of each agent. 
We must do so, simply because it is only at the margin that 
any of those shiftings can occur by which changed relations of 
supply and demand manifest themselves*. 

got an equal amonnt of good out of the last bundle of 7am that she applied to 
socks, and the last she applied to vests. 

1 Some critics of the modern doctrine of value have misunderstood its 
character and supposed that it represents the marginal use of a thing as 
ffoverniiuj the value of the whole. It is not so ; the modern doctrine says we 
must go to the margin to study the action of those forces which govern the 
value of the whole : and that is a very different affair. Of course the with- 
drawal of iron from any of its necessary uses would have just the same 
influence on its value as its withdrawal from its marginal uses ; in the same 
way as, in the case of a boiler for cooking under high pressure, the pressure in 
the boiler would be affected by the escape of any other steam just as it would 
by the escape of the steam in one of the safety valves. But in fact the steam 
does not escape except through the safety valves; and iron, or any other 
agent of production, is not thrown out of use except at points on its marginal 






§ 1. In the last chapter we confined our attention to the 
manner in which the national income is distributed among 
the various agents of production, in accordance with the 
quantity of each agent, and the services which it renders. 
We have now to consider the other side of the problem, viz. 
the influence which the remuneration of each agent exerts on 
the supply of that agent. 

When a man is fresh and eager, and doing work of his 
own choice, it really costs him nothing. For as 
some socialists have urged with pardonable ex- yields ° 
aggeration, few people know how much they p^^^^"^^- 
enjoy moderate work, till something occurs to prevent them 
from working altogether. But rightly or wrongly, most 
persons believe that the greater part of the work which 
they do, when earning their living, yields them no surplus 
of pleasure ; but on the contrary costs them something. They 
are glad when the hour for stopping arrives: perhaps they, 
forget that the earlier hours of their work have not cost them 
as much as the last. 

The longer a man works, or even is on duty, the greater 
is his desire for a respite, unless indeed he has become 



1, 2. 

numbed by his work; while every hour's additional work 
gives him more pay, and brings him nearer to 





to increased 


the stage at which his most urgent wants are 

satisfied; and the higher the pay, the sooner 
this stage is reached. It depends then on the 
individual, whether with growing pay new wants 
arise, and new desires to provide comforts for others or for 
himself in after years; or he is soon satiated with those 
enjoyments that can be gained only by work, and then craves 
more rest, and more opportunities for activities that are them- 
selves pleasurable. No universal rule can be laid down ; but 
experience seems to show that the more ignorant and phleg- 
matic of races and of individuals, especially if they live in a 
southern clime, will stay at their work a shorter time, and 
will exert themselves less while at it, if the rate of pay rises 
so as to give them their accustomed enjoyments in return for 
less work than before. But those whose mental horizon is 
wider, and who have more firmness and elasticity of character, 
will work the harder and the longer the higher the rate of 
pay which is open to them; unless indeed they prefer to 
divert their activities to higher aims than work for material 
gain. But this point will need to be discussed more fully 
under the head of the influence of progress on value. On the 
whole then we may conclude that increased remuneration 
causes an immediate increase in the supply of efiicient work, 
as a rule; and that the exceptions to this rule, though 
significant, are seldom on a large scale. 

§ 2. When however we turn from the immediate influence 
exerted by a rise in wages on the work done by an individual 
to its ultimate effect after a generation or two, the result is 
less uncertain. It is indeed true that, though a 
temporary improvement will give a good many 
young people the opportunity to marry and set 
up house, for which they have been waiting ; yet 
a permanent increase of prosperity is quite as 

Supply of 




mainly on 




likely to lower as to raise the birth-rate. But on the other 
hand, an increase of wages is almost certain to diminish the 
death-rate, unless it has been obtained at the price of the 
neglect by mothers of their duties to their children. And 
the case is much stronger when we look at the influence of 
high wages on the physical and mental vigour of the coming 

For there is a certain consumption which is strictly 
necessary for each grade of work in this sense, that if any of 
it is curtailed the work cannot be done efficiently : the adults 
might indeed take good care of themselves at the expense of 
their children, but that would only defer the decay of effici- 
ency for one generation. Further, there are conventional 
necessaries, which are so strictly demanded by custom and 
habit, that in fact people generally would give up much of 
their necessaries, strictly so called, rather than go without the 
greater part of these. Thirdly, there are habitual comforts, 
which some, though not all, would not entirely relinquish even 
when hardly pressed. Many of these conventional necessaries 
and customary comforts are the embodiment of material and 
moral progress, and their extent varies from age to age and 
from place to place. The greater they are, the less economical 
is man as an agent of production. But, if they are wisely 
chosen, the greater they are the better for man : and that is 
the important matter. For man himself is always the sole 
end of production. 

Any increase in consumption that is strictly necessary to 
efficiency pays its own way and adds to, as much as it draws 
from, the national dividend. But an increase of consumption, 
that is not thus necessary, can be afforded only influence 
through an increase in man's command over expenditure 
nature : and that can come about through ad- of earnings. 
vance in knowledge and the arts of production, through im- 
proved organization and access to larger and richer sources 
of. raw material, and lastly through the growth of capital 


BOOK VI. CH. 11. S 2. 

and the material means of attaining desired ends in any 

Thus the question how closely the supply of labour 

responds to the demand for it, is in a great measure resolved 

into the question how great a part of the present consumption 

of the people at large consists of necessaries, strictly so 

called, for the life and efficiency of young and old ; how much 

consists of conventional necessaries which theoretically could 

be dispensed with, but practically would be preferred by the 

majority of the people to some of those things that were really 

necessary for efficiency ; and how much is really superfluous 

regarded as a means towards production, though of course 

part of it may be of supreme importance regarded as an end 

in itself. 

The earlier French and English economists classed nearly 
all the consumption of the working classes under the first 
head'. They did so, partly for simplicity, and partly because 
those classes were then poor in England and very poor in 
France ; and they inferred that the supply of labour would 
correspond to changes in the effective demand for it in the 
same way» though of course not quite as fast as that of 
machinery would. And an answer not very different from 
theirs must be given to the question with regard to the less 
advanced countries even now. For throughout the greater 
part of the world the working classes can afford but few 
luxuries and not even many conventional necessaries; and 
any increase in their earnings would result in so great an 
increase of their numbers as to bring down their earnings 
quickly to nearly the old level at their mere expenses of 
rearing. Over a great part of the worid wages are governed, 
nearly after the so-called iro7i or brazen law, which ties them 
close to the cost of rearing and sustaining a rather inefficient 
class of labourers. 

An regards the modem western worid the answer 

^ Compare Appendix E. § 1. 



materially different ; so great has been the recent advance in 

knowledge and freedom, in 

vigour and wealth, and in the 

easy access to rich distant fields for the supply of food and 
raw material. But it is still true even in England to-day 
that much the greater part of the consumption of the main 
body of the population conduces to sustain life and vigour; 
not perhaps in the most economical manner, but yet without 
any great waste. Doubtless some indulgences are positively 
harmful; but these are diminishing relatively to the rest; 
the chief exception perhaps being that of gambling. Most 
of that expenditure which is not strictly economical as a 
means towards efficiency, yet helps to form habits of ready 
resourceful enterprise, and gives that variety to life without 
which men become dull and stagnant, and achieve little 
though they may plod much ; and it is well recognized that 
even in western countries skilled labour is generally the 
cheapest where wages are the highest. It may be admitted 
that the industrial development of Japan is tending to show 
that some of the more expensive conventional necessaries 
might conceivably^^ be given up without a corresponding 
diminution of efficiency : but, though this experience may b^ 
fruitful of far-reaching results in the future, yet it has little 
bearing on the past and the present. It remains true that, 
taking man as he is, and has been hitherto, in the western 
worid the earnings that are got by efficient labour are not 
much above the lowest that are needed to cover the expenses 
of rearing and training efficient workers, and of sustaining 
and bringing into activity their full energies'. 

1 On all locomotives there is some brass or copper work designed partly 
fOT oniament. and which could be omitted or displaced without any loss to the 
efficiency of the steam-engine. Its amount does in fact vary with the taste of 
the officials who select the patterns for the engines of different railways But 
It might happen that custom required such expenditure; that the custom would 
not yield to argument, and that the raUway companies could not venture to 
offend agamst it. In that case, when dealing with periods during which the 
custom ruled, we should have to mclude the cost of that ornamental metal 





BOOK VI. CH. II. §§ 2, 3. 

We conclude then that an increase of wagas, unless earned 
under unwholesome conditions, almost always increases the 
strength, physical, mental and even moral of the coming 
generation; and that, other things being equal, an increase 
in the earnings that are to be got by labour increases its rate 
of growth; or, in other words, a rise in its demand price 
increases the supply of it. If the state of knowledge, and 
of social and domestic habits be given; then the vigour of 
the people as a whole if not their numbers, and both the 
numbers and vigour of any trade in particular, may be said 
to have a supply price in this sense, that there is a certain 
level of the demand price which will keep them stationary; 
that a higher price would cause them to increase, and that 
a lower price would cause them to decrease. 

Thus again we see that demand and supply exert equally 
important influences on wages; neither has a claim to pre- 
Twofoid dominance ; any more than has either blade of a 

influences pair of scissors, or either pier of an arch. Wages 

of demand j ^ 

and supply tend to equal the net product of labour; its 
on wages. marginal productivity rules the demand price for 
it ; and, on the other side, wages tend to retain a close though 
indirect relation with the cost of rearing, training and 
sustaining the energy of efficient labour. Thus the supply- 
price and the demand-price of labour tend to be equal : wages 
are not governed by demand-price nor by supply-price, but 
by the whole set of causes which govern demand and supply. 

§ 3. To pass to the material agents of production : — We 
have seen how the accumulation of capital is governed by a 
great variety of causes : by custom, by habits of self-control 
The supply ^^^ ^^ realizing the future, and above all by the 
of capital. power of family affection : security is a necessary 

condition for it, and the progress of knowledge and intelligence 

work iu the cost of producing a certain amount of locomotive horse-power, on 
the same level with the cost of the piston itself. And there are many practical 
problems, esi>ecially.8uch as relate to periods of but moderate length, in which 
conventional and real necessaries may be placed on nearly the same footing. 




furthers it in many wajrs. But though affected by many 
causes other than the rate of interest; and though the rate 
of saving of many people is but little affected by the rate 
of interest, while a few who have determined to secure an 
income of a certain fixed amount for themselves or their 
family will save less with a high rate than with a low rate 
of interest; yet a strong balance of evidence seems to rest 
with the opinion that a rise in the rate of interest, or 
demand-price for saving, tends to increase the volume of 


Thus then interest, being the price paid for the use of 
capital in any market, tends towards a level such that the 
aggregate demand for capital in that market, at interest 
that rate of interest, is equal to the aggregate governed 
stock forthcoming there at that rate. If the of suppijT^^ 
market, which we are considering, is a small a^^ demand. 
one — say a single town, or a single trade in a progressive 
country — an increased demand for capital in it will be 
promptly met by an increased supply drawn from surrounding 
districts or trades. But if we are considerina: the whole 
world, or even the whole of a large country as one market 
for capital, we cannot regard the aggregate supply of it as 
altered quickly and to a considerable extent by a change in 
the rate of interest. For the general fund of capital is the 
product of labour and waiting; and the extra work, and the 
extra waiting, to which a rise in the rate of interest would 
act as an incentive, would not quickly amount to much as 
compared with the work and waiting, of which the total 
existing stock of capital is the result. An extensive increase 
in the demand for capital in general will therefore be met for 
a time not so much by an increase of supply, as by a rise in 
the rate of interest; which will cause capital to withdraw 
itself partially from those uses in which the need for it is 
least urgent. It is only slowly and gradually that the 
1 See Book IV. Ch. vu. smnmarized in § 6. 



BOOK VI. OH. II. ^ 3—6. 


Land is on 
a different 
footing from 
other agents 
of production. 

land itself-. 

rise in the rate of interest will increase the total stock of 

§ 4. We here take " Land " to include all tliose agents of 
production which are supplied freely by nature in quantities 
less than man needs \ And land is on a different 
footing from man himself and those agents of pro- 
duction which are made by man ; among which 
are included improvements made by him on the 
For while the supplies of all other agents of 
production respond in various degrees and various ways to 
the demand for their services, land makes no such response. 
Thus an exceptional rise in the earnings of any class of 
labour, tends to increase its numbers, or efficiency, or both ; 
and the increase in the supply of efficient work of that class 
tends to cheapen the services which it renders to the com- 
munity. If the increase is in their numbers then the rate of 
earnings of each will tend downwards towards the old level. 
But if the increase is in their efficiency; then, though they 
will probably earn more per head than before, the gain to 
them will come from an increased national dividend, and will 
not be at the expense of other agents of production. And the 
same is true as regards capital : but it is not true as regards 
land. While therefore the value of land, in common with the 
values of other agents of production, is subject to those 
influences which were discussed towards the end of the pre- 
ceding chapter; it is not subject to those which have been 
brought into the reckoning in the present discussion. 

§ 5. To conclude this stage of our argument :— The net 
aggregate of all the commodities Droduced is itself the true 
source from which flow the demand prices for all these com- 
modities, and therefore for the agents of production used 
m making them. Or, to put the same thing in another way, 

1 See Book iv. Chapter ii. § 1. 

2 For a further discussion of this suhject see rrincqAes, VI. u. 5. Com- 
pare also Appendices C and B below. 



this national dividend is at once the aggregate net product of, 
and the sole source of payment for, all the The earnings 

asrents of production within the country: it is of the several 

. agents of 

divided up into earnings of labour; interest of production, 

capital ; and lastly the producer's surplus, or rent, thei> marginal 

of land. It constitutes the whole of them, and services, 

the whole of it is distributed among them ; and national 

the larger it is, the larger, other things being dividend. 

equal, will be the share of each of them. Any addition to 

the share of any one, the stock of which can be increased 

by human effort, will cause the stock of it to be increased. 

But the increase may be slow : for it may be checked by 

habit and custom, and in the case of labour by the growth 

of new conventional necessaries. And, if there is no very 

violent change in the arts of production or the general 

economic condition of society, the stock of each agent will 

stand always in a close relation to its cost of production : 

account being taken of those conventional necessaries, which 

constantly expand as the growing richness of the national 

income yields to one class after another an increasing surplus 

above the mere necessaries for efficiency. 

The national income is distributed among these several 
agents in proportion to the need which people have for their 
several services — i.e. not the total need, but the 'marginal 
need. By this is meant the need at that point, at which 
people are indifferent whether they purchase a little more 
of the services (or the fruits of the services) of one agent, 
or devote their further resources to purchasing the services 
(or the fruits of the services) of other agents. 

§ 6. There remain some points on which a little more 
needs to be said here. 

In studying the influence which increased efficiency and 
increased earnings in one trade exert on the condition of 
others we may start from the general fact that, other things 
being equal, the larger the supply of any agent of production, 



BOOK TI. CH. II. g 6, 7. 

the further will it have to push it8 way iuto uses for which 
inyTenf '^ '' "f '^"'"^^^ ^'**^ ^ ^^'^ l^^^r will be the 

benefit, demand price with which it will have to be con 

mo« o...„. tented in those uses in which its employment is" 
on the verge or margin of not being found profitable • and in 
.so far as competition equalizes the price which it gits in'all 
uses this pnce wiU be its price for all uses. The Ltra pro 
duction resulting from the increase in that agent of production 
wiU go to swell the national dividend, and other agents of 
produ^ion wiU benefit thereby: but that agent it^lf wil 
have to submit to a lower rate of pay 

For instance, if without any other change, capital in- 

k nd of ,:r' *'' """'"■• °' ''"^ ^y *<• do any particular 
kind of abour increases, their wages must fall. In either case 

naZT -T''/" "'"■^"^ P^<^"<=*-"' -d an inC^d 
nationa dividend : in either case the loss of one agent of 

sanly to all others. Thus an opening up of rich quarries of 
slate or an increase in numbers or efficiency of quar™ 
would tend to improve the houses of all cWs; ZZZd 
tend to increase the demand for bricklayers' a^d caipente.1 
Ubour and raise their wages. But it would injure the makei 

U r fif. ? "' P""*^""^" °' *>""'"« ™''*«rials, more than 
It benefited them as consumers. The increase in the supply 
of his one agent increases the demand for many others by a 

§ 7. Now we know that the wages of any worker, say for 

nstance a shoemaker, tend to be equal to the net product o 

Ins labour: and that since the wages of all worke^in thf 

oZ7,iT:: ^f'"^ g"-«^e tend to be equal to one another. 

the efficiency therefore in a state of equilibrium every worker 

labour to buy the net products of a hundred days' labour 



of other workei-s in the same grade with himself : he may 
select them in whatever way he chooses, so as to make up 
that aggregate sum. 

If the normal earnings of workers in another grade are 
half as high again as his own, the shoemaker must spend 
three days' wages in order to get the net product of two days' 
labour of a worker in that grade ; and so in proportion. 

Thus, other things being equal, every increase in the net 
efficiency of labour in any trade, including his own, will raise 
in the same proportion the real value of that part of his 
wages which the shoemaker spends on the products of that 
trade; and other things being equal, the level of the real 
wages of the shoemaker depends directly on the average 
increase in the efficiency of the trades, including his own, 
which produce those things on which he spends his wages. 
If any trade rejects an improvement by which its efficiency 
could be increased ten per cent., it inflicts on the shoemaker 
an injury measured by ten per cent, of that part of his wages 
which he spends on the products of that trade. But an 
increased efficiency on the part of workers, whose products 
compete with his own, may injure him temporarily at least, 
especially if he is not himself a consumer of those products. 

Again, the shoemaker will gain by anything that changes 
the relative positions of different grades in such a way as to 
raise his grade relatively to others. He will gain by an in- 
crease of medical men whose aid he occasionallv ^ , . 

. •' Relations 

needs. And he will gain more if those grades between 
which are occupied chiefly with the tasks of ^^^*^^^- 
managing business, whether manufacturing, trading, or any 
other, receive a great influx from other grades : for then 
the earnings of management will be lowered permanently 
relatively to the earnings of manual work, there will be a 
rise in the net product of every kind of manual labour ; and, 
other things being equal, the shoemaker will get more of 
every commodity on which he spends those wages that repre- 
sent his own net product. 



BOOK VI. CH. II. ^ 8, 9, 10. 

§ 8. The process of substitutio.i, of which we have been 
discussing the tendencies, is one fonn of competition ^d 
It may be weU to insist again that we do not assume' th»t 
competition is perfect. Perfect competition ^t irTa ^ll 
Knowiedg. ^now edge of the state of the market ; and 
cf-cVrATon *7.f °" .«■•-* departure from the actual facts 

bep.rf.c.. ""^ *•»« part of dealers when we are considering 

^f^t V K """"^ "^ *'"^'"^"" '" Lombard Street the 

Stock Exchange, or in a wholesale Produce Market • it woSl 
be altogether unreasonable to make this assumption wh^ we 

ufficient ali itlT^f " "' ''"''^'^- ^"'^ '^ ^ ™» ^-1 
sumcent alnhty to know everything about the market for 

grade. The older economists, in constant contact as thev 
we^ wuh the actual facts of business life, must have knoZ 
this well enough ; but they sometimes seemed to imply thTI 
tbey did a.ssume this perfect knowledge. 

It is therefore specially important to insist that we do 
no assume the member, of any industrial g„,up to be endowed 
with more abihty and forethought, or to be governed by 
motives other than those which a.. i„ fact normal to and 
would be attributed by eveiy well-informed person to the 
members of that group; account being taken Vf the .en^r^ 
conditions of time and pla^e. The,^ may be a go<^ deal^ 
wayward and impulsive action, sordid Ld .:^ ^^.t 
may m.„ ,e then- threads together; but there is a constat 

lid h7 child """ '° "''"' ^"*='' '"''''P^'-- ^- himself 
and his children as seen, to him on the whole the most 

advantageous of those which are within the range of h s 
resources, and of the efforts which he is able and willin. to 
make in older to reach them. ^ 

§ 9. The last group of questions, which still remain to 
be discussed, is concerned with the relation of capital in 


general to wages in general. It is obvious that though capital 
in general is constantly competing with labour Relations 
for the field of employment in particular trades ; and^'iabour 
yet since capital itself is the embodiment of in general, 
labour as well as of waiting, the competition is really be- 
tween some kinds of labour aided by a good deal of waiting, 
and other kinds of labour aided by less waiting. On the one 
side, for instance, are many who make slioes by hand, and a 
very few who make awls and other simple implements, aided 
by a little waiting ; on the other are a relatively small 
number who work powerful sewing-machines which were 
made by engineers, aided by a good deal of waiting. There 
is a real and effective competition between labour in general 
and waiting in general. But it covers a small part of the 
whole field, and is of small importance relatively to the 
benefits which labour derives from obtaining cheaply the 
aid of capital, and tlierefore of eflicient methods in the 
production of things that it needs. 

For speaking generally, an increase in the power and the 
willingness to save will cause the services of waiting to be 
pushed constantly further ; and will prevent it from obtaining 
employment at as high a rate of interest as before. That is, 
the rate of interest will constantly fall, unless indeed invention 
opens new advantageous uses of roundabout methods of pro- 
duction. But this growth of capital will increase the national 
dividend ; open out new and rich fields for the employment of 
labour in other directions ; and will thus more than compensate 
for the partial displacement of the services of labour by those 
of waiting. 

§ 10. It is to be understood that the share of the national 
dividend, which any particular industrial class re- . 

ceives during the year, consists either of things labour in 
that were made during the year, or of the equi- ^dvan " 


valents of those things. For many of the things made by 
made, or partly made, during the year will remain 

M. 17 


BOOK VI. CH. II. § 10. 

in the possession of employers and other capitalists, and be 
added to the stock of capital ; while in return the employers, 
directly or indirectly, hand over to the working classes some 
things that had been made in previous years \ 

Thus finally, capital in general and labour in general 
co-operate in the production of the national dividend, and 
draw from it their earnings in the measure of their respective 
(marginal) efficiencies. Their mutual dependence is of the 
closest ; capital without labour is dead ; the labourer without 
the aid of his own or someone else's capital would not long be 
alive. Where labour is energetic, capital reaps a high reward 
and grows apace ; and, thanks to capital and knowledge, the 
ordinary labourer in the western world is in many respects 
better fed, clothed and even housed than were princes in. 
earlier times. The co-operation of capital and labour is as 
essential as that of the spinner of yarn and the weaver of 
cloth : there is a little priority on the part of the spinner ; 
but that gives him no preeminence. The prosperity of each 
is bound up with the strength and activity of the other; 
though each may gain temporarily, if not permanently, a 
somewhat larger share of the national dividend at the expense 
of the other. 

In the modern world, the employer, who may have but 
little capital of his own, acts as the boss of the great 
industrial wheel. The interests of owners of capital and 
of workers radiate towards him and from him : and he 
holds them all together in a firm grip. He will therefore 
take a predominant place in those discussions of fluctuations 
of employment and of wages, which are deferred to the 
second volume of this treatise; and a prominent, though 
not predominant, place in those discussions of the secondary 
features in the mode of action of demand and supply peculiar 
to labour, capital and land respectively, which will occupy the 
next eight chapters. 

1 As to the so-called Wages-Fund doctrine, see Ai>pendix E § 2. Nrtj 




§ 1. We have now to apply the general reasonings of 
Book V. and of the first two chapters of the present 
Book to the special problems of Earnings, Profits, present and 
and Rent; and to examine in more detail how seven"""^'"^ 
difierent kinds of Labour, Capital, and Natural chapters. 
Agents earn their several shares of the national dividend. 
The present chapter is devoted to methods of reckoning 
earnings. It is mainly a question of arithmetic or book- 
keeping: but it is not unimportant'. 

When watching the action of demand and supply with 
regard to a material commodity, we are constantly met by the 
difficulty that two things which are being sold under the same 
name in the same market, are really not of the same quality 
and not of the same value to the purchasers. Or, if the 
things are really alike, they may be sold even in the' face of 
the keenest competition at prices which are nominally dif- 
ferent, because the conditions of sale are not the same : for 
instance, a part of the expense or risk of delivery which is 
borne in the one case by the seller may in the other be 
transferred to the buyer. But difficulties of this kind are 
much greater in the case of labour than of material commodi- 
ties : the true price that is paid for labour often differs widely, 
and in ways that are not easily traced, from that which is 
nominally paid. 

1 On the subject of this chapter compare Schloss' Methods of Tndxistrial 


BOOK VI. CH. III. § 1. 

The earnings (or wages) which a person gets in any given 
time, such as a day, a week, or a year, may be called his 
Time- Time-eamings (or Time-wages) : and we may tlien 

earnings. regard competition, or to speak more exactly, 

economic freedom and enterprise, as tending to make Time- 
earnings in occupations of equal difficulty and in neighbouring 
places (not equal, but) proportionate to the efficiency of the 

But this phrase, " the efficiency of the workers," has some 
Payment by ambiguity. AVhen the payment for work of any 
Piece-work. ^:^^^ -g apportioned to the quantity and quality 
of the work turned out, it is said that uniform rates of 
Piece-work wages are being paid ; and if two persons work 
under the same conditions and with equally good appliances, 
they are paid in proportion to their efficiencies when they 
receive piece-work wages calculated by the same lists of prices 
for each several kind of work. If however the appliances are 
not equally good, a uniform rate of piece-work wages gives 
results disproportionate to the efficiency of the workers. If, 
for instance, the same lists of piece-work wages were used in 
Lancashire Cotton Mills supplied with old-fashioned machinery, 
as in those which have the latest improvements, the apparent 
equality would represent a real inequality. The more effective 
competition is, and the more perfectly economic freedom and 
enterprise are developed, the more surely will the lists be 
higher in the mills that have old-fashioned machinery than in 
the others. 

In order therefore to give its right meaning to the state- 
ment that economic freedom and enterprise tend to equalize 
wages in occupations of the same difficulty and in the same 
neighbourhood, we require the use of a new term; and we 
may find it in Efficiency-wages, or more broadly Effici^ncy- 
Efficiency- earnings; that is, earnings measured, not as 
earnings. Time-eamings are with reference to the time 

spent in earning them ; and not as piece-work earnings are 



with reference to the amount of output resulting from the 
work by which they are earned ; but with reference to the 
severity of the task which was imposed on the worker ; or, to 
get at the same result by another route, the exertion of 
ability and efficiency required of him. For competition tends 
to make the earnings got by two individuals of unequal effi- 
ciency in any given time, say, a day or a year, not equal, 
but unequal ; and, in like manner, it tends not to equalise, 
but to render unequal the average weekly wages in two 
districts in which the average standards of efficiency are 
unequal. Given that the average strength and energy of the 
working-classes are higher in the North of England than in 
the South, it then follows that the more completely " compe- 
tition makes things find their own level," the more certain is 
it that average weekly wages will be higher in the North than 
in the South. 

The tendency then of economic freedom and enterprise 
(or in more common phrase, of competition) to cause every 
one's earnings to find their own level, is a tendency to 
equality of Efficiency- camming s in the same district. This 
tendency will be the stronger, the greater is the mobility of 
labour, the less strictly specialised it is, the more keenly 
parents are on the look out for the most advantageous occu- 
pations for their children, the more rapidly they are able to 
adapt themselves to changes in economic conditions, and 
lastly the slower and the less violent these changes are. 

This statement of the law is, however, still subject to a 
slight correction. For we have hitherto supposed Low-waged 
that it is a matter of indifference to the employer raiiy"dearflf *' 
whether he employs few or many people to do a working with 

•,.,,•,. expensive 

piece of work provided his total wages-bill for machinery, 
the work is the same. But that is not the case. Those 
workers who earn most in a week when paid at a given rate 
for their work, are those who are cheapest to their employers 
(and ultimately to the community, unless indeed they over- 



strain themselves, and work themselves out prematurely). 
For they use only the same amount of fixed capital as their 
slower fellow workers ; and, since they turn out more work, 
each part of it has to bear a less charge on this account. The 
Prime costs are equal in the two cases ; but the Total cost of 
that done by those who are more efficient, and get the higher 
Time-wages, is lower than that done by those who get the 
lower Time-wages at the same rate of piece-work payment. 

This point is seldom of much importance in out-of-door 
work, where there is abundance of room, and comparatively 
little use of expensive machinery; for then, except in the 
matter of superintendence, it makes very little diiFerence to 
the employer, whose wages-bill for a certain piece of work is 
£100, whether that sum is divided between twenty efficient 
or thirty inefficient workers. But when expensive machinery 
is used which has to be proportioned to the number of 
workers, the employer would often find the total cost of his 
goods lowered if he could get twenty men to turn out for 
a wages-bill of X50 as much work as he had previously got 
• done by thirty men for a wages-bill of £40. In all matters 
of this kind the leadership of the world lies with America, 
and it is not an uncommon saying there that he is the best 
business man who contrives to pay the highest wages. 

The corrected law then stands that the tendency of eco- 
nomic freedom and enterprise is generally to equalize efficiency- 
earnings in the same district: but where much expensive fixed 
capital is used, it would be to the advantage of the employer 
to raise the Time-earnings of the more efficient workers more 
than in proportion to their efficiency. 

Of course this tendency is liable to be opposed by special 
customs and institutions, and, in some cases, by trades-union 

§ 2. Thus much with regard to estimates of the work for 
which the earnings are given : but next we have to consider 
more carefully the facts, that in estimating the real eamino^s 



of an occupation account must be taken of many things 
besides its money receipts, and that on the other side of the 
account we must reckon for many incidental disadvantages 
besides those directly involved in the strain and stress of 
the work. 

As Adam Smith says, " the Real wages of labour may be 
said to consist in the quantity of the necessaries „ . 

^ •' _ Real wrages 

and conveniences of life that are given for it ; and Nominal 

its Nominal wages in the quantity of money wages. 

The labourer is rich or poor, is well or ill rewarded, in pro- 
portion to the real, not to the nominal, wages of his labour'." 
But the words " that are given for it " must not be taken to 
apply only to the necessaries and conveniences that are directly 
provided by the purchaser of the labour or its products ; for 
account must be taken also of the advantages which are 
attached to the occupation, and require no special outlay on 
his part. 

In endeavouring to ascertain the Real wages of an occu- 
pation at any place or time, the first step is to allow for 
variations in the purchasing power of the money in which 
Nominal wages are returned; and especially we must take 
account of those things on which the class of labour in question 
spends most of its wages. For instance, the prices of velvet, 
of operatic entertainments and scientific books are not very 
important to the lower ranks of industry : but a fall in the 
price of bread or of shoe leather affects them much more 
than it does the higher ranks. 

Next; allowance must be made for all trade expenses. Thus 
from the barrister's gross income we must deduct the rent of 
his office and the salary of his clerk : from the carpenter's 
gross income we must deduct the expenses which he incurs for 
tools ; and when estimating the earnings of quarrymen in any 
district we must find oilt whether local custom assigns the 

1 Wealth of Nations, Book i. Cli. v. 



BOOK VI. CH. HI. §§ 2, 3. 

expenses of tools and blasting powder to them or their em- 
ployers. And on the other hand we must reckon in all the 
allowances, and privileges, such as those of a cottage rent 
free or at a low rent, and of course free board and lodging 
when they are given \ 

§ 3. Next we have to take account of the influences 
Uncertainty exerted on the real rate of earnings in an occupa- 
^j^j^ by the uncertainty of success and the in- 
constancy of occupation in it. 

We should obviously start by taking the earnings of an 
occupation as the average between those of the successful 
and unsuccessful members of it ; taking care to get the true 
averaged We thus obviate the necessity of making any 
separate allowance for insurance against risk ; but account '' 
remams to be taken of the evil of uncertainty. For there are 
many people of a sober steady-going temper, who like to 
know what is before them, and who would far rather have an 
appomtment which offered a certain income of say £400 a 
year than one which was not unlikely to yield £600, but had 
an equal chance of affording only £200. Uncertainty, there- 
fore, which does not appeal to great ambitions and lofty 
aspirations, has special attractions for very few ; while it acts 
as a deterrent to many of those who are making their choice 
of a career. And as a rule the certainty of moderate success 
attracts more than an expectation of an uncertain success that 
has an equal actuarial value. 

But on the other hand, if an occupation offers a few 

aJrV^lJ f'""^^ ^ T""^'^ ^\^^'''' ^*^"" ^« "^««^ ^'^'^ ^^^-eive them, not at 
theu- cost to those who give them. This poiiit and the evUs of the Truck 
system are dwelt on in Principles VI. iii. 5. 

nf fwii^''^""^^^ ^^'■""'^! ?^ *^°'^ '^^'^ ^^^ successfiU are £2000 a year, and 

be il200 a year if the former group is as large as the latter; but if as is 
perhaps the case barristers, the unsuccessful are ten thnes as mmUrous 
as the successful, the true average is but £550. And further, many 7^Z 
who have faded most completely, are likely to have left the occupS 
altogether, and thus to escape being coimted occupation 




extremely high prizes, its attractiveness is increased out of 
all proportion to their aggregate value. For this there are 
two reasons. The first is that young men of an adventurous 
disposition are more attracted by the prospects of great suc- 
cess than they are deterred by the fear of failure; and the 
second is that the social rank of an occupation depends more 
on the highest dignity and the best position which can be 
attained through it than on the average good fortune of those 
engaged in it. 

"We may next consider the influence which inconstancy of 
employment exerts on wages. It is obvious that irregularity of 
in those occupations, in which employment is employment, 
irregular, the pay must be high in proportion to the work 
done: the medical man and the shoeblack must each receive 
when at work a pay which covers a sort of retaining fee for 
the time when he has nothing to do. If the advantages of 
their occupations are in other respects equal, and their work 
equally diflicult, the bricklayer when at work must be paid a 
higher rate than the joiner, and the joiner than the railway 
guard. For work on the railways is nearly constant all the 
year round; while the joiner and the bricklayer are always in 
danger of being made idle by slackness of trade, and the 
bricklayer's work is further interrupted by frost and rain. 
The ordinary method of allowing for such interruptions is to 
add up the earnings for a long period of time and to take the 
average of them; but this is not quite satisfactory unless we 
assume that the rest and leisure, which a man gets when out 
of employment, are of no service to him directly or indirectly. 
Next we must take account of the opportunities which a 
man's surroundings may afford of supplementing 
the earnings which he gets in his chief occupa- menti^r^ 
tion, by doing work of other kinds. And ac- ^*^"^"es- 
count may need to be taken also of the opportunities which 
these surroundings offer for the work of other members of his 


BOOK VI. CH. III. § 4. 




The attrac- 
tiveness of a 
trade depends 
not on its 
ings, but its 
Net Ad- 
vantages ; 

Thus then the attractiveness of a trade depends on 
many other causes besides the difficulty and 
strain of the work to be done in it on the one 
hand, and the money-earnings to be got in it on 
the other. And when the earnings in any occu- 
pation are regarded as acting on the supply of 
labour in it, or when they are spoken of as being 
its supply price, we must understand that the term Earnings 
is only used as a short expression for its Net Advantages. We 
must take account of the facts that one trade is healthier or 
cleanlier than another, that it is carried on in a more whole- 
some or pleasant locality, or that it involves a better social 
position; as is instanced by Adam Smith's well-known remark 
that the aversion which many people have for the work of a 
butcher, and to some extent for the butcher himself, raises 
the earnings of butchers above those of bakers. 

Of course individual character will always assert itself in 
subject to dif. estimating particular advantages at a high or a 

ch"r"ac?e°be- ^""^ ""^J^^- ^^^^ P^^^'^^ ^^r instance are so fond 
tween indi- of having a cottage to themselves that they prefer 
VI uais, living on very low wages in the country to 

getting much higher wages in the town; while others are in- 
different as to the amount of house-room they get, and are 
willing to go without the comforts of life provided they can 
procure what they regard as its luxuries. Personal peculi- 
arities, such as these, prevent us from predicting with cer- 
tainty the conduct of particular individuals. But if each 
advantage and disadvantage is reckoned at the average of the 
Baoney values it has for the class of people who would be 
likely to enter an occupation, or to bring up their children to 
it, we shall have the means of estimating roughly the relative 
strengths of the forces that tend to increase or diminish the 
supply of labour in that occupation €it the time and place which 
we are considering. For it cannot be too often repeated that 
grave errors are likely to result from taking over an estimate 

of this kind based on the circumstances of one time and place, 
and applying it without proper precaution to those of another 
time or another place. 

Lastly, the disagreeableness of work seems to have very 
little effect in raising wages, if it is of such a 
kind that it can be done by those whose indus- industrial 
trial abilities are of a very low order. For the ^'■^*^^^- 
progress of sanitary science has kept alive many people who 
are unfit for any but the lowest grade of work. They compete 
eagerly for the comparatively small quantity of work for 
which they are fitted, and in their urgent need they think 
almost exclusively of the wages they can earn: they cannot 
afford to pay much attention to incidental discomforts and 
indeed the influence of their surroundings has prepared many 
of them to regard the dirtiness of an occupation as an evil of 
but minor importance. 

And from this arises the strange and paradoxical result 
that the dirtiness of some occupations is a cause a -, 

n , . 1 » An evil 

01 the lowness of the wages earned in them. For paradox, 
employers find that this dirtiness adds much to the wages 
they would have to pay to get the work done by skilled men 
of high character working with improved appliances; and so 
they often adhere to old methods which require only unskilled 
workers of but indifferent character, and who can be hired for 
low (Time-) wages, because they are not worth much to any 
employer. There is no more urgent social need than that 
labour of this kind should be made scarce and dear. 



arities in the 
action of 
demand and 
supply with 
regard to la- 
bour are cu- 
mulative in 
their effects. 



Ma„^ ^' r'' ^^l!^^. ^^P*"" ^^ ''•^""^"d the difficulties of as 
M,nx p.u... eert.„.„g the real as opposed to the nominal p„^e 

of abour. But now we have to study some peculi- m the action of the forces of demand and 
-pply regard to labour which are of a more 
vital character; since they aifect not merely the 

We shall ri' .r/'r *'' ^"^^*""«« "f '»'-' -«on 

obvious effe^s Fo flts in 'tTe'l 'f "r '-^^ ^"^ ""^^ 
society may be di^d^ . . "^ "''""' •■"•"'"gements of 

effects a^or are lot / "''"' "'=''''"""« =« *'*«i'- 

"*> ""^ ""^ not cumulahve; that is is t)>»„ -J j 

not end with the evil bv wh,Vl, f>, ^ "'" °'" '''' 

do not have the i^d eS Tffet f f "'• ' '^"'^''''' ''"'' ''" ''■• 
the worke,^ or of hf ? / ^ov,em,^ the character of 

higher eamin-s whiVlT ' ? ^''^''*^'' «*^rength and 



§ 2. The first point to which we have to direct our 
attention is the fact that human agents of pro- First pecuii- 
duction are not bought and sold as machinery ^orker^seiis 
and other material agents of production are. his work, but 
The worker sells his work, but he himself remains perty in him- 
his own property : those who bear the expenses *^^^' 
of rearing and educating him receive but very little of the 
price that is paid for his services in later years. 

Whatever deficiencies the modern methods of business 
may Jiave, they have at least this virtue, that he consequently 
who bears the expenses of production of material t^e investment 
goods, receives the price that is paid for them, him is limited 
He who builds factories or steam-engines or ?^ *?^ means, 

o the forc- 

houses, or rears slaves, reaps the benefit of all thought, and 

■ . 1 • 1 . 1 1 1 1 the unselfish- 

net services which they render so long as he nessofhis 

keeps them for himself ; and when he sells them parents. 
he gets a price which is the estimated net value of their 
future services. The stronsfer and the more eflicient he makes 
them, the better his reward; and therefore he extends his 
outlay until there seems to him no good reason for thinking 
that the gains resulting from any further investment would 
compensate him. But the investment of capital in the rearing 
and early training of the workers of England is limited by 
the resources of parents in the various grades of society, by 
their power of forecasting the future, and by their willingness 
to sacrifice themselves for the sake of their children. 

This evil is indeed of comparatively small importance with 
regard to the higher industrial grades. For in those grades 
most people distinctly realize the future, and " discount it at 
a low rate of interest." They exert themselves much to 
select the best careers for their sons, and the best trainings 
for those careers ; and they are generally willing and able to 
incur a considerable expense for the purpose. The profes- 
sional classes especially, while generally eager to save some 




BOOK VI. CH. IV. §§ 2, 3. 

capital for their children, are even more on the alert for 
opportunities of investing it in them. And whenever there 
occurs in the upper grades of industry a new opening for 
which an extra and special education is required, the future 
gains need not be very high relatively to the present outlay, 
in order to secure a keen competition for the post. 

But in the lower ranks of society the evil is great. For 

TchlMrTn^"^ ^^^ ^^^''^^'' "'^''''^ ^''^ education of the parents, 
of poor and the comparative weakness of their power of 

parents. distinctly realizing the future, prevent them from 

investing capital in the education and training of their 
children with the same free and bold enterprise with which 
capital is applied to improving the machinery of any well- 
managed factor^-. Many of the children of the working- 
classes are imperfectly fed and clothed ; they are housed in a 
way that promotes neither physical nor moral health ; they 
receive a school education which, though in modern England 
It may not be very bad so far as it goes, yet goes only a little 
way ; they have few opportunities of getting a broader view 
of life or an insight into the nature of the higher work of 
business, of science or of art ; they meet hard and exhausting 
toil early on the way, and for the greater pai-t keep to it all 
their lives. At last they go to the grave carrying with them 
undeveloped abilities and faculties ; which, if they could have 
borne full fruit, would have added to the material wealth of 
the country— to say nothing of higher considerations— many 
times as much as would have covered the expense of providing 
adequate opportunities for their development. 

But the point on which we have specially to insist now is 
This evil is that this evil is cumulative. The worse fed are 
cumu ative. ^^le children of one generation, the less will they 
earn when they grow up, and the les.s will be their power of 
providing adequately for the material wants of their children • 
and so on : and again, the less fully their own faculties are 




Start in life. 

developed, the less will they realize the importance of develop- 
ing the best faculties of their children, and the less will be 
their power of doing so. And conversely any change that 
awards to the workers of one generation better earnings, 
together with better opportunities of developing their best 
qualities, will increase the material and moral advantages 
which they have the power to offer to their children : while 
by increasing their own intelligence, wisdom and forethought, 
it will also to some extent increase their willingness to 
sacrifice their own pleasures for the well-being of their 
children ; though there is much of that willingness now even 
among the poorest classes, so far as their means and the limits 
of their knowledge will allow. 

§ 3. The advantages which those born in one of the 
higher grades of society have over those bom 
in a lower, consist in a great measure of the 
better introductions and the better start in life which they re- 
ceive from their parents. But the importance of this good start 
in life is nowhere seen more clearly tlian in a comparison of 
the fortunes of the sons of artisans and of unskilled labourers. 

There are not many skilled trades to which the son of an 
unskilled labourer can get easy access ; and in 

.11 • . K ^ T^« sons of 

the large majority of cases the son follows the artisans and 
father's calling. In the old-fashioned domestic °f^^b°"'-"^' 
industries this was almost a universal rule ; and, even under 
modern conditions, the father has often great facilities for 
introducing his son to his own trade. 

But the son of the artisan has further advantages. He 
generally lives in a better and cleaner house, and under 
material surroundings that are more consistent with refine- 
ment than those with which the ordinary labourer is familiar. 
His parents are likely to be better educated, and to have a 
higher notion of their duties to their children ; and, last but 
not least, his mother is likely to be able to give more of her 
time to the care of her family. 


BOOK VT. CH. TV. §§ 3 — 5. 

If we compare one country of the civilized world with 
anotlier, or one part of England witli another, or one trade in 
England with another, we find that the degradation of the 
working-classes varies almost uniformly with the amount of 
rough work done by women. The most valuable of all capital 
is that invested in human beings; and of that capital the 
most precious part is the result of the care and influence of 
the mother, so long as she retains her tender and unselfish 
instincts, and has not been hardened by the strain and stress 

of unfeminine work. 

§ 4. As the youth grows up, the influence of his parents 
and his schoolmaster declines ; and thenceforward to the end 
of his life his character is moulded chiefly by the nature of 
his work and the influence of those with whom he associates 
for business, for pleasure and for religious worship. 

Sqpiething has already been said of the technical training 
of adults, of the decadence of the old apprentice- 

The technical ,», t,». i, i»r?j- 

training of the ship system, and of the difliculty of hndmg any- 
workshop de- ^j^-^ ^^ ^.^^^ -^g rAace. Here again we meet the 

pends in a o ir '-' 

great measure difliculty that whoever may incur the expense oi 
selfishness of investing capital in developing the abilities of the 
the employer, ^orknian, those abilities will be the property of 
the workman himself: and thus the virtue of those who have 
aided him must remain for the greater part its own reward. 

It is true that high-paid labour is really cheap to those 
employers who are aiming at leading the race, and whose 
ambition it is to turn out the best work by the most advanced 
methods. They are likely to give their men high wages and 
to train them carefully ; partly because it pays them to do 
so, and partly because the character that fits them to take 
the lead in the arts of production is likely also to make them 
take a generous interest in the well-being of those who work 
for them. But though the number of such employers is 
increasing, they are still comparatively few. 

Again, in paying his workpeople high wages and in caring 



for their happiness and culture, the liberal employer confers 
benefits which do not end with his own genera- ^^ benefits are 
tion. For the children of his workpeople share cumulative, 

. , ^ -111 butaccrueonly 

in them, and grow up stronger in body and in part to him 
in character than otherwise they would have o*" his heirs, 
done. The price which he has paid for labour will have borne 
the expenses of production of an increased supply of high 
industrial faculties in the next generation : but these faculties 
will be the property of others, who will have the right to hire 
them out for the best price they will fetch : neither he nor 
even his heirs can reckon on reaping much material reward 
for this part of the good that he has done. 

§ 5. The next of those characteristics of the action of 
demand and supply peculiar to labour, which we 
have to study, lies in the fact that when a person peculiarity, 
sells his services, he has to present himself where 7^^ seller of 

' '^ labour must 

they are delivered. It matters nothing to the deliver it him- 


seller of bricks whether they are to be used in 
building a palace or a sewer : but it matters a great deal to 
the seller of labour, who undertakes to perform a task of 
given difficulty, whether or not the place in which it is to 
be done is a wholesome and a pleasant one, and whether or 
not his associates will be such as he cares to have. In those 
yearly hirings which still remain in some parts of England, 
the labourer inquires what sort of a temper his new employer 
has, quite as carefully as what rate of wages he pays. 

This peculiarity of labour is of great importance in many 
individual cases, but it does not often exert a The effects of 
broad and deep influence of the same nature as *^»sarenot 

^ generally 

that last discussed. The more disagreeable the cumulative, 
incidents of an occupation, the higher of course are the wages 
required to attract people into it : but whether these incidents 
do lasting and wide-spreading harm depends on whether they 
are such as to undermine men's physical health and strength 
or to lower their character. When they are not of this sort, 
M. 18 


BOOK VI. CH. IV. §§ 5, 6. 



they are indeed evils in themselves, but they do not generally 
cause other evils beyond themselves ; their effects are seldom 

Since however no one can deliver his labour in a market 
in which he is not himself present, it follows that the mobility 
of labour and the mobility of the labourer are convertible 
terms : and the unwillingness to quit home, and to leave old 
associations, including perhaps some loved cottage and burial- 
ground, will often turn the scale against a proposal to seek 
better wages in a new place. And when the different mem- 
bers of a family are engaged in different trades, and a migra- 
tion, which would be advantageous to one member, would be 
injurious to others, the inseparability of the worker from his 
work considerably hinders the adjustment of the supply of 
labour to the demand for it. 

§ 6. Again, labour is often sold under special disadvan- 
tages, arising from the closely connected group of 

Third and i»,.i<ii • .,, or 

fourth pecu- tacts that labour power is " perishable^ that the 
Labour is Sellers of it are commonly poor and have no re- 
perishable and serve fund, and that they cannot easily withhold 
are ofte " at a ^* ^^*^^ ^^^ market. Perishableness is an attri- 
disadvantage bute common to the labour of all grades: the 

in bargaining. • i i 

time lost when a worker is thrown out of employ- 
ment cannot be recovered, though in some cases his energies 
may be refreshed by rest\ 

The want of reserve funds and of the power of long with- 
holding their labour from the market is common to nearly 
all grades of those whose work is chiefly with their hands. 
But it is especially true of unskilled labourers, partly because 
their wages leave very little margin for saving, partly because 
when any group of them suspends work, there are large 
numbers who are capable of filling their places. And, as we 
shall see presently when we come to discuss trade combina- 
tions, it is more difficult for them than for skilled artisans to 

1 See above, Ch. m. § 3. 

form themselves into strong and lasting combinations; and 
so to put themselves on something like terms of equality in 
bargaining with their employers. For it must be remem- 
bered that a man who employs a thousand others, is in himself 
an absolutely rigid combination to the extent of one thousand 
units among buyers in the labour market. But these state- 
ments do not apply to all kinds of labour. Domestic servants 
though they have not large reserve funds, and seldom any 
formal trades-union, are sometimes better able than their 
employers to act in concert ^ 

Turning next to the highest grades of industry, we find 
that as a rule they have the advantage in bargaining over 
the purchaser of their labour. Many of the professional 
classes are richer, have larger reserve funds, more knowledge 
and resolution, and much greater power of concerted action, 
with regard to the terms on which they sell their services, 
than the greater number of th'eir clients and customers ^ 

It is however certain that manual labourers as a class 
are at a disadvantage in bargaining; and that This last evil 
the disadvantage wherever it exists is likely to be ^^ cumulative. 

1 The total real wages of the domestic servants of fashionable London are 
very high in comparison with those of other trades in which equal skill and 
ability are required. But those domestic servants who have no specialized 
skill, and who hire themselves to persons with very narrow means, have not 
been able to make even tolerably good terms for themselves : they work very 
hard for very low wages. 

2 If further evidence were wanted that the disadvantages of bargaining 
under which the vendor of labour commonly suffers, depend on his own 
circumstances and qualities, and not on the fact that the particular thing 
which he has to sell is labour ; such evidence could be found by comparing the 
successful barrister or solicitor or physician, or opera singer or jockey with 
the poorer independent producers of vendible goods. Those, for instance, 
who in remote places collect shell-fish to be sold in the large central markets, 
have little reserve funds or knowledge of the world, and of what other 
producers are doing in other parts of the country : while those to whom they 
sell, are a small and compact body of wholesale dealers with wide knowledge 
and large reserve funds ; and in consequence the sellers are at a great disad- 
vantage in bargaining. And much the same is true of the women and children 
who sell hand-made lace, and of the garret masters of East London who sell 
furniture to large and powerful dealers. 






BOOK VI. CH. IV. § 6. 

cumulative in its effects. For though, so long as there is any 
competition among employers at all, they are likely to bid for 
labour something not very much less than its real value to 
them, that is, something not very much less than the highest 
price they would pay rather than go on without ijb -, yet any- 
thing that lowers wages tends to lower the efficiency of the 
labourer's work, and therefore to lower the price which the 
employer would rather pay than go without that work. The 
effects of the labourer's disadvantage in bargaining are there- 
fore cumulative in two ways. It lowers his wages ; and as we 
have seen, this lowers his efficiency as a worker, and thereby 
lowers the nonnal value of his labour. And in addition it 
diminishes his efficiency as a bargainer, and thus increases the 
chance that he will sell his labour for less than its normal 





§ 1. The next peculiarity in the action of demand and 
supply with regard to labour, which we have to p.^^j^ ecuii- 
consider, is closely connected with some of those arity. siow- 
we have already discussed. It consists in the of new supples 
length of time that is required to prepare and of labour, 
train labour for its work, and in the slowness of the returns 
which result from this training. 

Not much less than a generation elapses between the choice 
by parents of a skilled trade for one of their Difficulty of 
children, and his reaping the full results of their [°turrof"^ ^^^ 
choice. And meanwhile the character of the trades, 
trade may have been almost revolutionized by changes, of 
which some probably threw long shadows before them, but 
others were such as could not have been foreseen even by the 
shrewdest persons and those best acquainted with the circum- 
stances of the trade. 

The working classes in nearly all parts of England are 
constantly on the look-out for advantageous openings for the 
labour of themselves and their children ; and they are eager 
to learn from friends and relations who have settled in other 
districts everything that they can as to the wages that are 
to be got in other trades. It is astonishing with what assiduity 
and sagacity many of them pursue their inquiries, not only as 
to the money wages to be obtained in a trade, but also as to 
all those incidental advantages and disadvantages which have 
been discussed in the last chapter but one. But it is very 
difficult to ascertain the causes that are likely to determine 

^ . 



the distant future of the trades which they are selecting for 
their children; and there are not many who enter on this 
abstruse inquiry. The n.ajority assume without a further 
thought that the condition of each tmde in their own time 
sufhciently indicates what it will be in the future; and, so far 
as the influence of this habit extends, the supply of labour in 
a trade m any one generation tends to conform to its earnings 
not m that but in the preceding generation. 

Again, some parents, observing that the earnings in one 
trade have been for some years rising relatively to others 
in the same grade, assume that the cou.«e of change is likely 
to continue in the same direction. But it often happens 

^l iT'T, ^ "" "^"^ '" '""P''""^ '=''''«««> ""d that, 
Z, !. r ^"^ "° <'^<=«P*'°»''l influx of labour into 

the trade the nse would have been followed by a fall instead 
of a further nse : and, if there is such an exceptional influx 
the consequence may be a supply of labour so excessive, that 
Its earnings remain below their normal level for many years 

.-,-. /^"t ye must not omit to notice those adjustments of 
the supply of labour to the demand for it, which" are effected 
by movements of adults from one trade to another, one grade 
The move- *" another, and one place to another. The move 
ments of adui. ments from one gnvde to another can seldom be 
on a very large scale; although it is true that 
exceptional opportunities may sometimes develop rapidly a 
great deal of latent ability among the lower grades. Thus 
for instance, the sudden opening out of a new country, or such 
an event as the American War, will raise from the lower 
ranks of labour many men who bear themselves well in 
(Umeult and responsible posts. 

And the movements of adult labour from trade to trade 
are however *"" ^'"on" P'^ce to place Can in some cases be so 
ofmcreasing large and so rapid as to reduce within a very 
short compass the period which is required to 




enable the supply of labour to adjust itself to the demand. 
That general ability which is easily transferable from one 
trade to another, is every year rising in importance relatively 
to that manual skill and technical knowledge which are 
specialized to one branch of industry'. And thus economic 
progress brings with it on the one hand a constantly increasing 
changefulness in the methods of industry, and therefore a 
constantly increasing difficulty in predicting the demand for 
labour of any kind a generation ahead ; but on the other hand 
it brings also an increasing power of remedying such errors of 
adjustment as have been made. 

§ 3. Thus these market variations in the price of a 
commodity are governed by the temporary re- 

, . , "^ 1 1 1 1 J 1 1 . . Fluctuations 

lations between demand and the stock that is in of earnings are 
the market or within easy access of it. When ^u^^i"!*^ 

•^ chiefly by 

the market price so determined is above its fluctuations of 
nonnal level, those who are able to bring new 
supplies into the market in time to take advantage of the 
high price receive an abnormally high reward. If they are 
small handicraftsmen working on their own account, the 
whole of this rise in price goes to increase their earnings. 

In the modern industrial world, however, those who 
undertake the risks of production and to whom the benefits 
of any rise in price, and the evils of any fall come in the 
first instance, are employers and other business men. But 
the force of competition among the employers themselves, each 
desiring to extend his business, and to get for himself as 
much as possible of the rich harvest that is to be reaped when 
their trade is prosperous, makes them consent to pay higher 
wages to their employees in order to obtain their services. 
Even if they act in combination, they are not likely to 
endeavour to deprive the workman of all share of the harvest 
of good times : nor if they did make the attempt, would it be 
at all likely to succeed. 

Thus the high wages of coal-miners during the inflation 
which culminated in 1873, were determined for the time by 

1 See Book iv. Ch. vi. § 1. 



BOOK VI. CH. V. SS 3, 4. 

the relation in which the demand for their services stood to 
Illustration the amount of skilled mining labour available, 
to'^o^fthecJai *^® unskilled labour imported into the trade 
trade. being counted as equivalent to an amount of skilled 

labour of equal efficiency. Had it been impossible to import 
any such labour at all, the earnings of miners would have been 
limited only by the elasticity of the demand for coal on the 
one hand, and the gradual coming to age of the rising gene- 
ration of miners on the other. As it was, men were drawn 
from other occupations which they were not eager to leave; 
for they could have got high wages by staying where they 
were, since the prosperity of the coal and iron trades was but 
the highest crest of a swelling tide of credit. These new 
men were unaccustomed to underground work; its discomforts 
told heavily on them, while its dangers were increased by their 
want of technical knowledge, and their want of skill caused 
them to waste much of their strength. The limits therefore 
which their competition imposed on the rise of the temporary 
wages of miners' skill were not narrow. 

When the tide turned, those of the new-comers who were 
least adapted for the work, left the mines ; but even then the 
miners who remained were too many for the work to be done, 
and their wage fell, till it reached that limit at which they 
could get more by selling their labour in other trades. And 
that limit was a low one ; for the swollen tide of credit, which 
culminated in 1873, had undermined solid business, impaired 
the true foundations of prosperity, and left nearly every trade 
in a more or less unhealthy and depressed condition. The 
miners had therefore to sell their skilled labour in markets 
which were already over full, and in which their special skill 
counted for nothing. 

§ 4. To conclude this part of our argument. The market 
price of everything, i.e. its price for short periods, is deter- 
mined mainly by the relations in which the demand for it 
stands to the available stocks of it; and in the case of 
labour or any other agent of production this demand is 




" derived " from the demand for those things which the agent 
is used in making. In these relatively short periods fluctua- 
tions in wages follow, and do not precede, fluctuations in the 
selling prices of the goods produced. 

But the incomes which are being earned by all agents 
of production, human as well as material, and those which 
appear likely to be earned by them in the future, exercise a 
ceaseless influence on those persons by whose action the 
future supplies of these agents are determined. There is a 
constant tendency towards a position of normal equilibrium, 
in which the supply of each of these agents shall stand in 
such a relation to the demand for its services, as to give to 
those who have provided the supply a sufficient reward for 
their efforts and sacrifices. If the economic conditions of 
the country remained stationary sufficiently long, this ten- 
dency would realize itself in such an adjustment of supply to 
demand, that both machines and human beings would earn 
generally an amount that corresponded fairly with their cost 
of rearing and training, conventional necessaries as well as 
those things which are strictly necessary being reckoned for. 
But conventional necessaries might change under the influence 
of non-economic causes, even while economic conditions them- 
selves were stationary : and this change would affect the supply 
of labour, and thus modify the national dividend and slightly 
alter its distribution. As it is, the economic conditions of the 
country are constantly changing, and the point of adjustment 
of normal demand and supply in relation to labour is constantly 
being shifted \ 

1 1, " ^'^'"''P^^' ^- ^'^ t^e argnment of this last Section is pursued more at 
length, and with reference to several difficulties that are ignored here In 
particular it is argued that the extra income earned by some natural abilities 
may be regarded as a Rent sometimes, but not when we are considering the 
normal earnings of a trade. This analogy is valid so long as we are merely 
analysing the source of the incomes of individuals, and it might even l)e 
carried further if persons were bom with rare abilities specialised to particular 
branches of production. 




§ 1. The main i)rinciples of tlie action of demand and 
supply with regard to capital have been discussed in the first 
two chapters of this Book. We there looked back at the 
results of our earlier studies, and endeavoured to brin^' 
t<3gether and study in their mutual relations a number of 
separate doctrines as to capital, each of which is familiar to 
every intelligent man ; though he may not be able, without 
some special study, to see their bearings on one another and 
the part they severally play in the great central problem of 

But in earlier times even great thinkers failed not only to 
understand the part which capital plays in this great pro- 
blem, but even to recognise clearly many of the separate 
truths which are now regarded as common-place. They 
were impressed by observing that most borrowers were 
poor, that most lenders were rich; that the lenders very 
often suffered no material loss through making a loan, and 
that they often wrung exorbitant usury out of the needs of 
the poor. These facts enlisted their sympathies; and, aided 
by some specious metaphysical reasoning, j)revented them 
from perceiving that he who lends to another hands over to 
him the power of using temporarily some desirable thing, and 
that this action has as much right to payment, as the act of 
handing to him absolutely some other thing of smaller value. 



If the first man he rich it may be his duty in either case to 
confer a benefit freely on his poorer neighbour without ex- 
pecting anything in return. But if a person can use £100 so 
as to produce, after allowing for his trouble, things worth £103 
net at tlie end of a year, there is no reason for his lending the 
£100 free of interest to another, which would not require him 
to make to that other a free present of £3. ' 

§ 2. We have seen that interest is the reward of waiting 
in the same sense that wages are the reward of labour. Much 
work is pleasurable ; but every one claims his full pay for all 
the work he does for others as a matter of ordinary business, 
however pleasurable it may be to himself. Similarly many 
people would wish to defer some of their enjoyments, even if 
they had to put by the money, which gives command over 
them, without hope of interest : but yet those who have the 
means of lending, will not lend gratis as a rule ; because, even 
if they have not themselves some good use to which to turn 
tlie capital or its equivalent, they are sure to be able to find 
others to whom its use would be of benefit, and who would pay 
for the loan of it : and they stand out for the best market. 
And there always is a market, because though the stock of 
loanable wealth is increasing fast, new openings for its profit- 
able use are ever being made by the progress of the mechanical 
arts and the opening up of new countries. 

But now we may leave these general considerations, and 
make a more detailed study of this notion of Inte- Net and Gross 
rest. For the interest of which we speak when interest. 
we say that interest is the earnings of capital simply, or the 

1 This line of argument is pursued in some detail in Principles VI. vi. It 
is argued that the modern theories of C.a-1 Marx and some others as to 
capital, repeat this old en-or in a disguised form, and without the excuse 
which there was for it in earlier times: but that with this exception, the 
histoiy of the theory of interest has been one of almost continuous progress 
during the last three centuries: every generation has done something to 
forward it, none has been able to make any fundamental change. Reasons 
are also given for dissenting from Prof. Bijlun-Bawerk's doctrines ou the 


BOOK VI. CH. VI. §§ 2, 3. 

reward of waiting simply, is Net interest ; but what commonly 
passes by the name of Interest, includes other elements besides 
this, and may be called Gross interest. 

These additional elements are the more important the lower 
fnTudis's"": ^"^ "^^'^ rudimentary the state of commercial 
Insurance security and of the organization of credit Thus 

against risk, for instance, in medieval times, when a prince 
wanted to forestall some of his future revenues, he borrowed 
perhaps a thousand ounces of silver, and undertook to pay 
back fifteen hundred at the end of a year. There was how- 
ever no perfect security that he would fulfil the promise; and 
perhaps the lender would have been willing to exchange' that 
promise for an absolute certainty of receiving thirteen hundred 
at the end of the year. In that case, while the nominal rate 
at which the loan was made, was fifty per cent., the real rate 
was thirty. 

The necessity for making this allowance for insurance 
and also Earn- against risk is SO obvious, that it is not often 
':^:^l^^^' ^^e^l^oked. But it is less obvious that every 
loan causes some trouble to the lender; that when 
from the nature of the case, the loan involves considerable 
risk, a great deal of trouble has often to be taken to keep 
these risks as small as possible ; and that then a great part of 
what appears to the borrower as interest, is, from the point of 
view of the lender, Earnings of Management of a troublesome 

At the present time the net interest on capital in England 
is a little under three per cent, per annum ; for no more\han 
tliat can be obtained by investing in such first-rate Stock 
Exchange securities as yield to the owner a secure income 
without appreciable trouble or expense on his part. And 
when we find capable business men borrowing on perfectly 
secure mortgages, at (say) four per cent., we may regard that 
gross interest of four per cent, as consisting of net interest or 
interest proper, to the extent of a little under three per ceLt 




and of Earnings of Management by the lenders to the extent 
of rather less than one per cent. 

Again, a pawnbroker's business involves next to no risk ; 
but his loans are generally made at the rate of 25 per cent, 
per annum, or more; the greater part of which is really 
Earnings of Management of a troublesome business. Or to 
take a more extreme case, there are men in London and Paris 
and probably elsewhere, who make a living by lending money 
to costermongers : the money is often lent at the beginning of 
the day for the purchase of fruit, <fec., and returned at the end 
of the day, when the sales are over, at a profit of ten per 
cent.; there is little risk in the trade, and the money is 
seldom lost. Now a farthing invested at ten per cent, a day 
would amount to a billion pounds at the end of a year. But 
no one can become rich by lending to costermongers ; because 
no one can lend much in this way. The so-called interest on 
the loans really consists almost entirely of earnings of a kind of 
work for which few capitalists have a taste. 

§ 3. It is then necessary to analyse a little more care- 
fully the extra risks which are introduced into 
business when much of the capital used in it sis of Gross in- 
has been borrowed. Let us suppose that two men ^*^'^^^*- 
are carrying on similar businesses, the one working with his 
own, the other chiefly with borrowed capital. 

There is one set of risks which is common to both ; which 
may be described as the Trade Risks of the particular 
business in which they are engaged. They arise from fluctua- 
tions in the markets for their raw materials 

jiii'ui jr £ 1 fi Trade Risks. 

and tinisned goods, irom unioreseen changes of 
fashion, from new inventions, from the incursion of new and 
powerful rivals into their respective neighbourhoods, and so 
on. But there is another set of risks, the burden of which 
has to be borne by the man working with borrowed capital, 
and not by the other; and we may call them Personal 




BOOK VI. cr. VI. § 3. 

Hisks. For he who lends capital to be used by Personal 
another for trade purposes, has to charge a high ^^^ks. 
interest as insurance against the chances of some flaw or 
deficiency in the borrower's personal character or ability. 

The price then that the borrower has to pay for the loan 
of capital, and which he regards as interest, is 
from the point of view of the lender more ?o7s"„otTend 
properly to be regarded as profits : for it includes *« equality, 
insurance against risks which are often very heavy, and 
Earnings of Management for the task, which is often very 
arduous, of keeping those risks as small as possible. Varia- 
tions in the nature of these risks and of the task of manage- 
ment will of course occasion corresponding variations in the 
Gross interest, so called, that is paid for the use of money. 
The tendency of competition is therefore not towards equaliz- 
ing this Gross interest : on the contrary, the more thoroughly 
lenders and borrowers understand their business, the more 
certainly will some classes of borrowers obtain loans at a 
lower rate than others. 

We must defer to a later stage our study of the marvel- 
lously efticient organization of the modern Money Market by 
which capital is transferred from one place where it is super- 
abundant to another where it is wanted ; or from one trade 
that is in the process of contraction to another which is being 
expanded : and at present we must be contented to take it 
for granted that a very small difference between the rates of 
Net interest to be got on the loan of capital in two different 
modes of investment in the same Western country will cause 
capital to flow, though perhaps by indirect channels, from the 
one to the other. 






§ 1. In the concluding Chapters of Book iv. we made 
some study of the various forms of business This Chapter 
management, and the faculties required for them; '" relation to 
and we saw how the supply of business power in of BookTv!***^ 
command of capital may be regarded as consisting of three* 
elements, the supply of capital, the supply of the business 
power to manage it, and the supply of the organization by 
which the two are brought together and made effective for 
production. We have now to carry this study further; and 
to inquire more closely into the nature of tlie services rendered 
to society by those who undertake and manage business 
enterprises, and the rewards of this work. We shall find 
that the causes which' govern the earnings of business men are 
less arbitrary, and present closer analogies to those which 
govern other kinds of earnings than is commonly supposed. 

We must however make a distinction at starting^ The 
Struggle for Survival tends to make those 
methods of organization prevail, which are best struggle for ^ 
fitted to thrive in their environment; but not ^"*^*^*i- 
necessarily those best fitted to be7ie/it their environment, 
unless it happens that they are duly rewarded for all the 
benefits which they confer, whether direct or indirect. And 
in fact this is not so. For as a general rule the Law of 
Substitution — which is nothing moi^e than a special and limited 
application of the Law of Survival of the Fittest— tends to 

^ See Book iv. Cb. vm. 




make one method of industrial organization supplant another 
when it offei-s a direct and immediate service at a lower price. 
The indirect and ultimate services which either will render 
have, as a general rule, little or no weight in the balance ; 
and as a result many businesses languish and die, which might 
in the long run have done good work for society if only they 
could have obtained a fair start. This is especially true of 
some forms of co-operative associations. 

In this connection we may divide employers and other 
undertakers into two classes, those who open out new and 
improved methods of business, and those who follow beaten 
tracks. The services which the latter perform for society are 
chiefly direct and seldom miss their full reward : but it is 
, otherwise with the former class. 

For instance, economies have lately been introduced into 
some branches of iron manufacture by diminishing the number 
of times which the metal is heated in passing from pig iron to 
its final form ; and some of these new inventions have been of 
such a nature that they could neither be patented nor kept 
secret. Let us suppose then that a manufacturer with a 
capital of £50,000 is getting in normal times a net profit of 
£4,000 a year, £1,500 of which we may regard as his Earnincrg 
of Management, leaving £2,500 for the other two elements of 
profits. We assume that he has been working so far in the 
same way as his neighbours, and showing an amount of ability 
which, though great, is no more than the normal or average 
ability of the people who fill such exceptionally difiicult post^'s; 
that is, we assume that £1,500 a year is the normal earnings 
for the kind of work he has been doing. But as time goes on, 
he thinks out a way of dispensing with one of the heatings 
that have hitherto been customary; and in consequence, 
without increasing his expenses, he is able to increase his 
annual output by things which can be sold for £2,000 net. 
So long, therefore, as he can sell his wares at the old price, 
his Eai-niiigs of Management will be £2,000 a year above the 


average ; and he will earn the full reward of his services to 
society. His neighbours however will copy his plan, and 
probably make more than average profits for a time. But 
soon competition will increase the supply, and lower the price 
of their wares, until their profits fall to about their old level ; 
for no one could get extra high wages for making eggs stand 
on their ends after Columbus' plan had become public 

Many business men whose inventions have in the long run 
been of almost priceless value to the world, have died in 
poverty; and while many men have amassed great wealth by 
good fortune, rather than by exceptional ability in the per- 
formance of public services of high importance, it is probable 
that those business men who have pioneered new paths have 
often conferred on society benefits out of all proportion to 
their own gains, even though they have died millionaires. 

§ 2. We will now begin by tracing the action of the 
Law of Substitution in adjusting the rewards of 
the services rendered to society by ordinary work- tIeWw°of °^ 
men, by foremen, and by employers of different .substitution 

1 ITIT- I- 1 1 ^" controllingr 

grades. We have already noticed that a great Earnings of 
part of the work done by the head of a small ^^"^^ement. 
business hunself, is relegated in a large business to salaried 
heads of departments, managers, foremen and others. And 
this thread will guide us to much that is useful for our present 
inquiry. The simplest case is that of the earnings of the 
ordinary foreman ; with which we may begin. 

Let us suppose, for instance, that a railway contractor or 
a dockyard manager finds that it answers best to have one 
foreman to every twenty labourers, and to pay him twice the 
wages of one of them. This means that, if he found himself 
with 500 labourers and 24 foremen, he would expect to get 
just a little more work done at the same expense by adding 
one more foreman, than by adding two more orrlinary 
labourers : while if he had had 490 labourers and 25 foremen, 
M. 29 


BOOK VI. CH. VII. §§ 2, 3. 

he would liiu e found it better to add two more labourers. If 
he could have got his foreman for one and a half times the 
wages of a labourer, perhaps he would have employed one 
foreman to every fifteen labourers. But, as it is, the number 
of foremen employed is determined at one-twentieth of that 
of the labourers, and their demand price at twice the 
labourers' wages. 

In exceptional cases the foremen may earn their wages 
by over-driving those whose work they superintend. But we 
may now suppose them to contribute to the success of* the 
undertaking in a legitimate way, by securing a better orga- 
nization of its details; so that fewer things are done amiss 
and need to be undone ; so that everyone finds the help that 
he wants in moving heavy weights, &c., ready for him just 
when he wants it ; so that all machinery and implements are 
kept in good working order, and no one has to waste his time 
and strength by working with inadequate appliances, and so 
on. The wages of foremen who do work of this kind may 
be taken as typical of a great part of the Earnings of Man- 
agement : society, acting through the individual employer, 
offers an effective demand for their services until that margin 
is reached at which the aggregate efficiency of industry would 
be increased by adding workers of some other grade more 
than by adding the foremen whose wages would add an equal 
amount to the expenses of production. 

§ 3. So far the Employer has been regarded as the agent 
through whom the Law of Substitution acts in 
contriving and arranging the factors of pro- 
duction so that the maximum of direct services 
(estimated by their money measure) should be 
performed at a minimum money cost. But now 
we have to look at the work of the employers themselves 
being contrived and arranged for them, though of course in 
a more haphazard fashion, by the immediate action of their 
own competition. 

The Law of 
acts through 
the employer 
and also on 


In the first place we find the small employer, who does the 
whole work of management and superintendence in his busi- 
ness competing with the large employer who retains in his own 
hands only the supreme work of controlling the higher policy 
of the business. And in this way as the earnings and services 
of foremen are weighed on the one side against those of ordinary 
labourers, so on the other the earnings and services of the 
foremen and managers who in the large business are hired to 
do much that the small employer does himself, are weighed 
against his'. 

It is true that the small employer needs capital of his 
own; but as we have already noticed^ there is a constant 
increase in the ease with which a man who has the faculties 
for managing a business, can borrow the requisite capital. 

It is true that the new man with but little capital of his 
own is at a disadvantage in trades which move 
slowly and in which it is necessary to sow a long ^^^ ''wor"*" 
time before one reaps. But in all those in- with borrowed 
dustries in which bold and restless enterprise *^*^*^* 
can reap a quick harvest; and in particular wherever high 
profits are to be made for a time by cheaper reproductions of 
costly wares, there the new man is in his element : it is he who 
by his quick resolution and dexterous contrivances, and perhaps 
also a little by his natural recklessness, " forces the pace." 

And he often holds his own with great tenacity even 
under considerable disadvantages; for the freedom 

i T ., « 1 . .,. . will work hard 

and dignity ot his position are very attractive to for a small re- 
him. Thus the peasant proprietor whose little '^"^' 
plot is heavily mortgaged, the small so-called "sweater" or 
" garret master " who takes out a sub-contract at a low price, 
will often work harder than the ordinary workman, and for a 
lower net income. And the manufacturer who is doing a 
large business with comparatively little capital of his own 

1 This point is worked out at some length in Principles VI. vii. 3, 4. 

2 Comj). Book IV. Ch.xii.g 7. 



BOOK VT. CH. VIT. ^ 3 — 5. 

will reckon his labour and anxiety almost as nothing, for 
he knows that he must anyhow work for his living, and he 
is unwilling to go into service to another : he will therefore 
work feverishly for a gain that would not count much in the 
balance with a wealthier rival, who, being able to retire and 
live in comfort on the interest of his capital, may be doubting 
whether it is worth while to endure any longer the wear-and- 
tear of business life\ 

§ 4. But the weighing in the balance of the services, and 
Joint stock therefore the earnings, of employees against the 
companies. Earnings of Management of employers is in 
some ways best illustrated by reference to Joint-stock com- 
panies. For in them most of the work of management is 
divided between salaried directors (who indeed hold a few 
shares themselves) and salaried managers and other sub- 
ordinate officials, most of whom have little or no capital of any 
kind; and their earnings, being almost the pure earnings of 
labour, are governed in the long run by those general causes 
which rule the earnings of labour of equal difficulty and dis- 
agreeableness in ordinary occupations. 

Joint-stock companies seldom have the enterprise, the 
energy, the unity of purpose and the quickness of action of a 
private business. But these disadvantages are of relatively 
small importance in some trades. That publicity, which is 
one of the chief drawbacks of public companies in many 
branches of manufacture and of speculative commerce, is a 
positive advantage in ordinary Banking and Insurance and 
kindred businesses ; while in these, as well as in most of the 
Transport industries (railways, tramways, canals, and the 
supply of gas, water and electricity), their unbounded com- 
mand over capital gives them almost undisputed sway. 

On the whole they exert a steadying influence on the 
demand for capital, and on the demand for labour of all kinds, 

1 The advantages and disadvantages of the undertaker , with borrowed 
capital are further discussed in Frinciples YI. vii. 5. 


and especially for the services of those who, having business 
ability but no capital of their own, desire to reap some Earn- 
ings of Management as salaried officials of a great under- 
taking. And as has already been observed. Co- 
operation promises, more than any other form of ^°-°p*'"**»°"- 
business association, to turn to good account the capabilities of 
the working man for the higher posts of business management. 
Thus then each of the many modern methods of business 
has its own advantages and disadvantages: and its application 
is extended under the action of the Law of Substitution in 
every direction until that limit or margin is reached, at which 
its special advantages for that use no longer exceed its dis- 

§ 5. The supply of business power is large and elastic, since 
the area from which it is drawn is wide. Everv- «,. 

1,11. » 1 . ^ TJ^e supply of 

one has the business of his own life to conduct ; business abi- 
this, if done well, affords to some extent training from^\*^wI^e 
for business management; and there is therefore *"*• 
no other kind of highly paid ability which depends so little 
on labour and expense applied specially to obtaining it, and 
which depends so much on so-called "natural a„d jg „„„. 
qualities." And, secondly, business power is specialized, 
highly non-specialized; because in the large majority of 
trades, technical knowledge and skill become every day less 
important relatively to the broad and non-specialized faculties 
of judgment, promptness, resource, carefulness and steadfast- 
ness of purpose. 

And we may conclude that the rarity of the natural 
abilities and the expensiveness of the special ^^ 

i • . 'IP, , ^ The adjust- 

traimng required for the work affect normal ment of Earn- 
Eamings of Management in much the same way lufty^andlm-' 
as they do the normal wages of skilled labour, portance of the 
In either case a rise in the income to be earned Siriy accu- ** 
sets in operation forces tending to increase the '"**^' 
supply of those capable of earning it ; and in either case the 


BOOK VI. CH. VII. § 5. 

extent to which the supply wiU be increased by a given rise 
of income, depends upon the social and economic condition 
of those from whom the supply is drawn. For though it is 
true that an able business man who starts in life with a great 
deal of capital and a good business connection is likely to 
obtain higher Earnings of Management than an equally able 
man who starts without these advantages; yet there are 
similar, though smaller, inequalities between the earnings of 
professional men of equal abilities who start with unequal 
social advantages; and the wages even of a working man 
depend on the start he has ha^ in life almost as much as on 
the expense which his father has been able to afford for his 
education ^ 

1 Some tlifficulties in obtaining accurate knowle<lge of the true Earnings 
of Management m different trades are indicated in rnncijde^ VI. vu. 7. 




§ 1. The jirojits of a business are the excess of its receipts 

over its outgoings, and the annual rate of profits is the ratio 

which the yearly profits bear to the capital in- vve have next 

vested. We have next to inquire whether there ^° examine the 

„ . tendency of the 

Ls any general tendency of the rate of profits to rate of profits 

equality, *° '*i"^"*y- 

Adam Smith said: "The whole drugs which the best 
employed apothecary iu a large market-town will sell in a 
year may not perhaps cost him above thirty or forty pounds. 
Though he should sell them, therefore, for three variations in 
or four hundred or a thousand per cent, profit nominal profits 
this may frequently be no more than the reason- andsmaii*'^^*' 
able wages of his labour in the only way in businesses, 
which he can charge them, upon the price of the drugs. The 
greater part of the apparent profit is real wages disguised in 
the garb of profit.'* 

But it is important to distinguish between the annuid 
rate of profits on the capital invested in a ^ „ 

V • J 1 I* Profits per 

business, and the rate of profits that are made annum and on 
every time the capital of the business is turned *""* *"^"°ver. 
over; that is every time sales are made equal to that 
capital, or the rate of profits on the turnover. At present we 
are concerned with profits jyer annum. 

The greater part of the nominal inequality between the 
normal rates of profit in small businesses and in large would 
disappear, if the scope of the term profits were narrowed in 




the former case or widened in the latter, so that it included 

Correction of "^ ^^^^ ^^^®^ ^^® remuneration of the same 
an anomaly of classes of Services. There are even reasons for 
anguage. thinking that the rate of profit, rightly estimated, 

on large capitals tends to be higher than on small. For of two 
businesses competing in the same trade, that with the larger 
capital can nearly always buy at the cheaper rate, and can 
avail itself of many economies in the specialization of skill and 
machinery and in other ways, which are out of the reach of 
the smaller business : while at most the only important ad- 
vantage, which the latter is likely to have, consists of its 
greater facilities for getting near its customers and consulting 
their individual wants. In trades in which this last advantage 
IS not important, and especially in some manufacturing trades 
in which the large firm can sell at a better price than the 
small one, the outgoings of the former are proportionately less 
and the incomings larger; and therefore, if the profits be 
reckoned in the same way in both cases, the rate of profits 
in the former case must be higher than in the latter. 

But these are the very businesses in which it most fre- 
quently happens that large firms after first crushing out small 
ones, either combine with one another and thus secure for 
themselves the gains of a limited monopoly, or by keen 
competition among themselves reduce the rate of profit very 
low. There are many branches of the textile, the metal, and 
the transport trades in which no business can be started at 
all except with a large capital; while those that are begun 
on a moderate scale struggle through great difficulties, in the 
hope that, after a time, it may be possible to find employment 
for a large capital, which will yield Earnings of Management 
high in the aggregate though low in proportion to the capital. 

There are some trades which require a veiy high order 
of ability, but in which it is nearly as easy to manage a veiy 
large business as one of moderate size. In rolling mills, for 
instance, there is little detail which cannot be reduced to 




routine, and a capital of £1,000,000 invested in them can be 
controlled by one able man. A rate of profits of 20 per 
cent., which is not a very high average rate for some parts of 
the iron trade, would give the owner of such works Earnings 
of Management amounting to more than £150,000 a year. 
And since iron-masters can with so little additional effort 
get the Earnings of Management on an increased capital, 
wealthy men remain in the trade longer than in most others ; 
and the competition of the great iron-masters with one another 
is said to have reduced the average rate of profits in the 
trade below the ordinary level. 

The rate of profits is low in nearly all those trades which 
require very little ability of the highest order, and in which 
a public or private firm with a good connection and a large 
capital can hold its own against new-comers, so long as it is 
managed by men of industrious habits with sound common 
sense and a moderate share of entei^rise. And men of this 
kind are seldom wanting either to a well-established public 
company or to a private firm which is ready to take the 
ablest of its servants into partnership. 

We may then conclude, firstly that the true rate of profits 
in large businesses is higher than at first sight General result 
appears, because much that is commonly counted of the compa- 
as profits in the small business ought to be classed large business- 
under another head before the rate of profits in ^* *"** small, 
it is compared with that in a large business : and secondly 
that, even when- this correction has been made, the rate of 
profits declines generally as the size of the business increases. 

§ 2. The normal Earnings of Management are of course 
high in proportion to the capital, and therefore 
the rate of profits per annum on the capital is where^fhe Ci^- 
high, when the work of management is heavy in c"iati"e cap»- 

. , . . ^^ ^ "^ tal is large re- 

proportion to the capital. Individual trades lativeiy to the 

have indeed peculiarities of their own ; and all ^'^^'^• 

rules on the subject are liable to great exceptions. But gene- 



rally it may be said that the extent of the work of manage- 
ment needed in a business depends more on the amou'nt 
ot Circulating capital used than on that of the Fixed The 
rate of profit tends therefore to be low in trades in which 
there is a disproportionately large amount of durable plant 
that requires but little trouble and attention when once 
It has been laid down. As we have seen, these trades are 
likely to get into the hands of joint-stock companies : and the 
aggregate salaries of the directors and higher officials bear a 
very small proportion to the capital employed in the case of 
railway and water companies, and, even in a more marked 
degree, of companies that own canals and docks and bridges'. 
§ 3. Our inquiry may now pass away from the annual 
rate of profits on the capital invested in a business, to the 
The rate of ^^*® ^^ profits that are made every time sales 

fJ^^'Jer." '"' ^"1"^^ ^ ^^^ ^•'^P^*^! ''^ the business are made, or, 
as is commonly said, the rate of profits " on the 
turnover." It is clear that if the average net profits in two 
businesses are twelve per cent, per annum, and the first turns 
over Its capital 4 times in the year and the other only once 
the profits on the turnover must be twelve per cent, in the 
latter case, and only about three per cent, in the former. 
And we are thus brought to consider the causes which de- 
termine the rate of profits on the "turnover;" or, which comes 
to the same thing, the percentage of the supply price of a 
commodity which has to be classed as profits. 

It is obvious that wholesale dealers, who buy and sell 
large quantities of produce in single transactions, and who are 
able to turn over their capital veiy rapidly, may make large 

1 ,■ ^''f ^^^""^ exceptionally high where the wages-bill is verjr large re- 
atively to the capital. This subject is treated in rnnci^les VI, vfii 2 where 

iLTn ' "^'' w ''^' '"''^"^*^ "^ *" "^« ^^«*^^ stLmen. that cln ^ 

trades IS that where eqnal capitals are employed, profits tend to be a certain 

!::T wSr"" ^" ^'^ '''''' ^^^^^'^•' ^^^^'^^' '-'^'^ ^ eertain'^^cXe 


fortunes though their average profits on the turnover are less 
than one per cent.; and, in the extreme case of 
large stock exchange dealings, even when they wideiy^^ Th°an 
are only a small fraction of one per cent. But a t^^ annual rate 
shipbuilder who has to put labour and material capiui. *iiius" 
into the ship, and to provide a berth for it, a long ^rative instan- 
while before it is ready for sale, and who has to 
take care for every detail connected with it, must add a very 
high percentage to his direct and indirect outlay in order to re- 
munerate him for his labour, and the locking up of his capital. 

Again, in the textile industries some firms buy raw material 
and turn out finished goods, while others confine themselves 
to spinning, to weaving, or to finishing : and it is obvious that 
the rate of profit on the turnover of one of the first class must 
be equal to the sum of the rates of profit of one of each of the 
three other classes. Again, the retail dealers' profit on the 
turnover is often only five or ten per cent, for commodities 
which are in general demand, and which are not subject to 
changes of fashion; so that while the sales are large, the 
necessary stocks are small, and the capital invested in them 
can be turned over very rapidly, with very little trouble and 
no risk. But a profit on the turnover of nearly a hundred 
per cent, is required to remunerate the retailer of some kinds 
of fancy goods which can be sold but slowly, of which varied 
stocks must be kept, which require a large space for their 
display, and which a change of fashion may render unsaleable 
except at a loss ; and even this high rate is often exceeded in 
the case of fish, fruit, flowers and vegetables. 

We see then that there is no general tendency of profits 
on the turnover to equality ; but there may be, and as a matter 
of fact there is in each trade and in every branch of each 
trade, a more or less definite rate of profits on the turnover 
which is regarded as a "fair" or normal rattj. Of course 
these rates are always changing in consequence of changes in 
the methods of trade ; which are generally begun by individuals 


BOOK VI. CH. VIII. §§ 8, 4, 5. 

who desire to do a larger trade at a lower rate of profit on 
the turnover than has been customary, but at a larger rate 
of profit per annum on their capital. If however there 
happens to be no great change of this kind going on, the 
traditions of the trade that a certain rate of profit on the 
turnover should be charged for a particular class of work are 
of great practical service to those in the trade. Such traditions 
are the outcome of much experience tending to show that, if 
that rate is charged, a proper allowance will be made for all 
the costs incurred for that particular purpose, and in addition 
the normal rate of profits per annum in that class of business 
will be afibrded. If they charge a price which gives. much 
less than this rate of profit on the turnover they can hardly 
prosper ; and if they charge much more they are in danger 
of losing their custom, since others can afford to undersell 
them. This is the » fair " rate of profit on the turnover which 
an honest man is expected to charge for making goods to 
order, when no price has been agreed on beforehand ; and it is 
the rate which a court of law will allow, in case a dispute 
should arise between buyer and seller. 

§ 4. During all this inquiry we have had in view chiefly 
Profits are a *^® ultimate, or long-period or true normal results 
cremeit of* ?^ economic forces ; we have considered the way 
normal in which the supply of business ability in command 

supp y-pnce. ^£ capital tends in the long run to adjust itself to 
the demand ; we have seen how under the action of the Law 
of Substitution it seeks constantly every business and every 
method of conducting every business in which it can render 
services that are so highly valued by persons who are able to 
pay good prices for the satisfaction of their wants, that those 
services will in the long run earn a high reward. The motive 
force is the competition of undertakers : each one tries every 
opening, forecasting probable future events, reducing them to 
their true relative proportions, and considering what surplus 
is likely to be afforded by the receipts of any undertaking over 


the outlay required for it. All his prospective gains enter 
into the profits which draw him towards the undertaking ; all 
the investments of his capital and energies in making the 
appliances for future production, and in building up the 
" Immaterial " capital of a business connection, have to show 
themselves to him as likely to be profitable, before he will 
enter on them : the whole of the profits which he expects from 
them enter into the reward, which he expects in the long run 
for his venture. 

Much of the argument of Chapter V. as to the earnings of 
industrial skill is applicable to the earnings of business power. 
There are, however, some differences between the two cases, 
which call for our study. 

§ 5. In the first place the undertaker's profits bear the 
first brunt of any change in the price of those Profits fluctu- 
things which are the product of his capital and^^nTven 
(including his business organization), of his greater ratio : 
labour and of the labour of his employes ; and as a result 
fluctuations of his profits generally precede fluctuations of 
their wages, and are much more extensive. For, other things 
being equal, a comparatively small rise in the price for which 
he can sell his product is not unlikely to increase his profit 
manyfold, or perhaps to substitute a profit for a loss. That 
rise will make him eager to reap the harvest of good prices 
while he can; he will be in fear that his employes will leave 
his employment or refuse to work. He will be more able 
and more willing to pay high wages ; and wages ^ut the wages 
will rise. But experience shows that (whether of employes lag 

, . ^ ,. ^ . , behind, and 

they are governed by sliding scales or not) they their fluctua- 
seldom rise as much in proportion as prices ; and *'°"® ^^^ ^^^®- 
therefore they do not rise nearly as much in proportion as 

Another aspect of the same fact is that when trade is 
bad, the employe at worst is earning nothing towards the 
support of himself and his family ; but the employer's out- 
goings are likely to exceed his incomings, particularly if he 


BOOK VT. CH. VIII. §§ 5, 6\ 

IS using much borrowed capital. In that case his Gross 
Earnings of Management are a negative quantity ; that is, he 
is losing his capital. In very bad times this happens to a 
great number, perhaps the majoiity of undertakers ; and it 
happens almost constantly to those who are less fortunate or 
less able, or less well fitted for their special trade than others. 
§ 6. To pass to another point, the number of those who 
The profits of ^ucceed in business is but a small per-centage of 

diffi:; m"'re' *^^ "^^"^^ ^ -'^'^^ ^^ *^^^^ h^«d« ^r« concentrated 
widely than t^e fortunes of others several times as numerous 

rngs^do^ "'"" *^ themselves, who have made savings of their 
own, or who have inherited the savings of others 
and lost them all, together with the fruits of their own efforts 
in unsuccessful business. In order therefore to find the 
average profits of a trade we must not divide the a-gre^ate 
profits made in it by the number of those who are reaping 
them, nor even by that number added to the number who 
have failed : but from the aggregate profits of the successful 
we must subtract the aggregate losses of those who have 
failed, and perhaps disappeared from the trade ; and we must 
then divide the remainder by the sum of the numbers of those 
who have succeeded and those who have failed. It is probable 
that the true Gross Earnings of Management, that is, the 
excess of profits over interest, is not on the average more than 
a half, and in some risky trades not more than a tenth part 
of what It appears to be to persons who form their estimate 
of the profitableness of a trade by observation only of those 
who have secured its prizes. There are however reasons for 
thinking that the risks of trade are on the whole diminishing 
rather than increasing'. ^ 

of o Jn '^ ^'^ Other diiferencen betueen the earnings of business power and 

^Zt'^f '^'"^'' ^Z " ."*"^ y "* '"^'^^'' ^« ^'«» «« of tl»e relation ui wWch 
eai-nmgs of management stand to the rent of exceptional ability, and of the 
conditions under which Profits are to be re.^arded as a Quasi-rent the reader 
18 referred to Fnncijtles, VI, vui. 





§ 1. We may call to mind that the land has an "in- 
herent" income of heat and light and air and rain, which 
man cannot appreciably affect; and advantages i„come 
of situation, of which many are beyond man's attributed 

1 /.I 'J 1- *° inherent 

control, while but few of the remainder are the properties 
direct result of the investment of capital and °^^^^' 
effort in the land by its individual owners. The supply of 
these properties is not dependent on human effort, and would 
therefore not be increased by extra rewards to that effort. 
On the other hand those chemical or mechanical properties 
of the soil, on which its fertility largely depends, can be 
modified, and in extreme cases entirely changed by man's 

Now let us revert to our study of the tendency to 
diminishing return in agriculture; still supposing that the 
owner of the land undertakes its cultivation, j^^^^^^^ ^^ 
so that our reasoning may be general, and Book iv. 
independent of the incidents of particular forms 
of land tenure. We saw how the return to successive "doses," 
or applications of capital and labour, though it may increase 
for the first few doses, will begin to diminish when the land 
is already well cultivated. The cultivator continues to apply 
additional capital and labour, till he reaches a point at which 
the return is only just sufficient to repay his outlay and 


BOOK VI. CH. IX. §§ 1, 2. 

reward him for liis own work. Tliat will be the dose on tlie 
margin of cultivation, whether it happens to be applied to 
rich or to poor land. .Vn amount equal to the return to it 
will be required, and will be sufficient to repay him for each 
of his previous doses ; and the excess of the gross produce 
over this amount is his producer's surplus. Supposing him 
to be a man of ordinary ability and enterprise and to farm 
fairly well, this will be what is commonly caUed the rental 
value of the land. 

This surplus or rental value depends on, firstly, the 
richness of the land, and secondly, the relative values of 
those things which he has to sell and of those things which 
he needs to buy. And the prices at which the various 
requisites of the farm can be bought, and its various products 
sold, depend on his surroundings ; and changes in that are 
continually changing the relative values of different crops and 
therefore the relative values of land in different situations. 

Thus it is important to remember that inequalities of 
situation relatively to the best markets are just as powerful 
causes of inequalities of producer's surplus a^ are inequalities 
of absolute productiveness. But England is so small and so 
thickly peopled, that the cultivator can get nearly the same 
net price in whatever part of England he is; and English 
economists have ascribed to fertility the first rank amoncr^'the 
causes which determine the value of agricultural land,"* and 
have treated situation as of secondary importance. They have 
therefore often regarded the producer's surplus, or rental 
value, of land as the excess of the produce which it yields, 
over what is returned to equal capital and labour (applied 
with equal skill) to land that is so barren as to be on the 
margin of cultivation ; without taking the trouble to state 
that separate allowance must be made for differences in the 
expense of marketing. But economists in new countries 
observing that the richest land may lie uncultivated if it 
has not good access to markets think of situation at least 



equally important with fertility in determining the value 
of land. In their view land on the margin of cultivation is 
land far from markets; and the producer's surplus presents 
itself to them as the excess value of the produce from well- 
situated land over that which equal labour, capital (and skill), 
would get on the worst situated land; allowance being of 
course made for differences of fertility, if necessary. 

§ 2. The argument of this chapter so far is applicable 
to all systems of land tenure, which recognize private owner- 
ship of land in any form ; for it is concerned Argument 
with that producer's surplus, which accrues to applicable to 

T« , . *11 systems 

the owner if he cultivates his land himself; or, of tenure, 
if he does not, then accrues to him and his tenants, regarded 
as a firm engaged in the business of cultivation. Thus it 
holds true, whatever be the division which custom or law or 
contract may have arranged between them with regard to 
their several shares of the cost of cultivation on the one hand, 
and the fruits of the cultivation on the other. Petty's 
memorable statement of the law of rent is so worded as to 
apply to all forms of tenure and to all stages of civiliza- 
tion: — "Suppose a man could with his own hands plant a 
certain scope of Land with Corn, that is, could Digg, or 
Plough; Harrow, Weed, Reap, Carry home, Thresh, and 
Winnow so much as the Husbandry of this Land requires ; 
and had withal Seed wherewith to sow the same. I say, 
that when this man hath subducted his seed out of the 
proceed of his Harvest, and also what himself hath both 
eaten and given to others in exchange for Clothes, and other 
Natural necessaries; that the Remainder of Corn, is the 
natural and true Rent of the Land for that year; and the 
medium of seven years, or rather of so many years as make 
up the Cycle, within which Dearths and Plenties make their 
revolution, doth give the ordinary Rent of the Land in 

1 Taxes and Contnbutioiis, iv. 13. 




BOOK VI. CH. IX. § 2. 

At the present day, in thos3 parts of England where 
custom and sentiment count for least, and free competition 
and enterprise for most in the bargaining for the use of 
land, it is commonly understood that the landlord supplies, 
and in some measure maintains, those improvements which 
are slowly made and slowly worn out. That being done, he 
requires of his tenant the whole producer's surplus which the 
land thus equipped is estimated to afford in a year of normal 
harvests and normal prices ; after deducting enough to replace 
the farmer's capital with normal profits ; so that the farmer 
stands to lose in bad years and gain in good years. In this 
estimate it is implicitly assumed that the farmer is a man of 
normal ability and enterprise for that class of holding; and 
therefore, if he rises above that standard, he will himself reap 
the benefit ; and if he falls below it will himself bear the loss, 
and perhaps ultimately leave the farm '. 

The so-called English system has some disadvantages ; but 
when we come to compare it with other systems, we shall see 
that it afforded great advantages to a country, which pion- 
eered the way for the world in the development of free 
enterprise ; and which therefore was impelled early to adopt 
all such changes as give freedom and vigour, elasticity and 

1 In other words, that part of the income derived from the land which the 
landlord obtains, is governed, for aU periods of moderate length, mainly by the 
market for the produce, with but little reference to the cost of providing the 
various agents employed in raising it; and it therefore is of the nature of a 
rent. And tliat part which the tenant retains, is to be regarded, even for 
short pei-iods, as profits entering directly into the normal price of the produce* 
because the produce would not be raised unless it were expected to yield those 
profits. The more fully therefore the distinctively English features of land 
tenure are developed, the more nearly is it true that the line of division be- 
tween the tenant's and the landlord's share coincides with the deepest and 
most important line of cleavage in economic theory. 




§ 1. In early times, and in some backwaixl countries even 
in our own age, all rights to property depend on E^^iy forms of 

general understandings rather than on precise Land-tenure 

. - have generally 

laws and documents. In so far as these under- been based on 

standings can be reduced to definite terms and Partnerships. 

expressed in the language of modern business, they are 

generally to the following effect : — The ownership of land 

is vested, not in an individual, but in a firm of which one 

member or group of members is the sleeping partner, while 

another member or group of members (it may be a whole 

family) is the working partner. 

The sleeping partner is sometimes the ruler of the State, 

sometimes he is an individual who inherits what was once 

the duty of collecting the payments due to this ruler from 

the cultivators of a certain part of the soil ; but what, in 

the course of silent time, has become a right of ownership, 

more or less definite, more or less absolute. The sleeping 

partner, or one of them, is generally called the proprietor, or 

landholder or landlord, or even the landowner ; though this is 

an incorrect way of speaking, when he is restrained by law 

or custom from turning the cultivator out of his holding, 

either by an arbitrary increase of the payments exacted from 

him or by any other means'. 

1 Custom is however really more elastic than at first sight appears, as is 
shown even by recent EugHsh history. Caution is therefore needed in 
applying Ricardian analysis to modern English land problems as well as to 
those arising out of more primitive systems of land tenure. See Principles VI. 

"^ ^' ^* 20—2 

i ' (, 

§ 2. Tn a great part of Latin Europe the land is divided 
Metayage or ^^^ holdings, which the tenant cultivates by the 
labour of himself and his family, and some- 
times, though rarely, that of a few hired labour- 
ei-s, and for which the landlord supplies buildings, cattle and, 
sometimes even, farm implements. This system is called 
Metayage. Its advantages are considerable when the holdings 
are very small, the tenants poor, and the landlords not averae 
to taking much trouble about small things: but it is not 
suitable for holdings large enough to give scope to the enter- 
prise of an able and responsible tenant. It is commonly 
associated with the system of peasant proprietorship ; and we 
may consider that next \ 

The position of a peasant proprietor has great attractions. 
The peasant He is free to do what he likes, he is not worried 
proprietor by the interference of a landlord, and the anxiety 
lest another should reap the fruits of his work and self- 
denial. His feeling of ownership gives him self-respect, and 
stability of character, and makes him provident and tem- 
perate in his habits. He is scarcely ever idle, and seldom 
regards his work as mere drudgery; it is all for the land 
that he loves so well. 

"The magic of property turns sand into gold," said 
Arthur Young. It undoubtedly has done so in many cases 
in which the proprietors have been men of exceptional energy. 
But such men might perhaps have done as well or better if 
their horizon had not been limited to the narrow hopes of a 
peasant proprietor. For indeed there is another side to the 
is generally an picture. "Land," We are told, "is the best 

industrious but • i_ i r» i 

seldom an effi- savings-bank for the working man." Sometimes 
cient worker it is the Second best. But the very best is the 
energy of himself and his children ; and the peasant pro- 

1 Metayage enables a poor mau to get the use of capital at a low cLarge 
and to have more freedom and responsibility than a hired labouier, though 
less than an Enghsh farmer. It is a form of Co-operation. 



prietors' thoughts are so full of the one that they often 
starve the other. Many even of the richest of them stint 
the food of themselves and their families : they pride them- 
selves on the respectability of their houses and furniture; 
but they live in their kitchens for economy, and are practically 
worse housed and far worse fed than the better class of 
English cottagers. And the poorest of them work hard 
during very long hours, but do not really get through much 
work, because they feed themselves worse than the poorest 
English labourers. They do not understand that wealth is 
useful only as the means towards a real income of happiness ; 
they sacrifice the end to the means. 

And it must be recollected that the English labourers 
represent the failures rather than the successes 

and he is not 

of the English system. They are the descendants so well repre- 
of those who for many successive generations "ew Worid^as 
have not availed themselves of the opportunities the English la- 
by which their abler and more adventurous 
neighbours were rising to leading posts at home, and, what is 
far more important, were acquiring the fee simple of a great 
part of the surface of the globe. Of the causes which have 
contributed to make the English race the chief owners of the 
New World, the most important is that bold enterprise which 
has made a man, who is rich enough to be a peasant proprietor, 
generally refuse to be content with the humdrum life and the 
narrow income of a peasant. And among the causes which 
have fostered this enterprise, none is more important than 
the absence of the temptations to wait about for a petty 
inheritance, and to marry for the sake of property rather 
than in the free exercise of individual choice — temptations 
which have often dulled the energy of youth in places in 
which peasant properties have predominated. 

It is partly in consequence of the absence of these temp- 
tations that the "farmers" of America, though ^^6 American 
they are men of the working class cultivating farmer. 




BOOK VI. CH. X. §§ 2—4. 

their own land witli their own hands, do not resemble "peasant 
proprietoi-s'." They invest their income freely and wisely in 
developing the energies of themselves and their children; 
and these energies constitute the chief pai-t of their capital, 
for their land generally is as yet of but little value. Their 
minds are always active, and though many of them have 
little technical knowledge of agriculture, their acuteness and 
versatility enable them to find out almost unerringly the best 
solution of the problem immediately before them. 

That problem is generally to obtain a produce large in 
American proportion to the labour spent on it, though 
methods of small in proportion to the abundant land at their 

cultivation. j- i t « » 

disposal. In some parts of America however, in 
which land is beginning to get a scarcity value, and in which 
the immediate neighbourhood of good markets is making an 
intensive cultivation profitable, the methods of farming and 
of tenure are rearranging themselves on the English model. 
And within the last few years there have been signs of a 
tendency on the part of native Americans to hand over to 
persons of recent European origin the farms of the West, as 
they have already done the farms of the East, and as they 
did long ago the textile industries. 

§ 3. Let us then turn to the English system of tenure. 
The English ^^^"1*7 and harsh as it has been in many respects, 
system it yet had a great power of stimulating and econo- 

mizing that enterprise and energy, which, aided by England's 
geographical advantages and freedom from devastating wars, 
gave her the leadership of the world in Manufacture and 
Colonization and, though in a less marked degree, in A<yri- 
culture. England has learnt lessons in agriculture from 

1 Tliree-fourths of the farms in the United States are cultivated by their 
owners ; and only one-third of the remainder is held by tenants under the 
English plan, while two-thirds are in a position somewhat similar to tliat of 
Metayers, except that they hold under definite contracts which are but Uttle 
influenced by custom. 



many countries and especially the Netherlands ; but on the 
whole she has taught far more than she has learnt. And 
there is now no country except the Netherlands, which can 
compare with her in the amount of produce per acre of fertile 
land ; and no country in Europe which obtains nearly so high 
returns in proportion to the labour expended in getting them. 
The chief merit of the system is that it enables the land- 
lord to keep in his own hands the responsibility 

1 111 a J.^ i. enables the 

for that part and only that part oi the property landlord to 

which he can look after with but little trouble to ^^pp^^ *^*J 
himself, and little vexation to his tenant. His which he can 
part consists of land, buildings and permanent 
improvements ; and averages in England five times that which 
the farmer has to supply himself. The landlord is willing to 
supply this five-sixths of the necessary capital at a net rent, 
which seldom gives as much as three per cent, interest on 
its cost ; and there is no other business in which the enter- 
prising undertaker can borrow what capital he wants at so low 
a rate, or can often borrow so large a part of his capital at any 
rate at all. 

The second merit of the English system, which partly 
follows from the first, is that it gives the land- 
lord considerable freedom in the selection of an considefabfe 

able and responsible tenant. But it is true that freedom of 

. selection, 

his good and bad qualities alike often tend to 

prevent his selecting tenants on strictly commercial principles. 

He seldom goes far afield for a new tenant : and until quite 

recently, he has seldom given facilities for an able working 

man, similar in character to the American farmer, to make a 

start on a small farm which he can cultivate with his own 

hands and those of his family and a few hired men\ 

§ 4. We may next inquire how far those general ten- 

1 The English system on the whole tends to promote the discovery and the 
diffusion of improved methods : but even in England progress hi agriculture ia 
slower than in manufactures. See Frinci^les VI. x. 7. 



BOOK VI. CH. X. § 4. 

dencies towards production on a large scale, which we studied 
m Book IV, are applicable to agriculture under nuxlern 
-bnghsh conditions. 

Firstly, agriculture must be spread over the broad land : 
raw material can be brought to the manufacturer 

Special con- q-.- ^v, »>"«- xiitniUAftc^urer 

ditionsofagri- for him to work on; but the agnculturist must 
seek his work. Again, the workers on the land 
must adapt their work to the seasons, and can seldom confine 
themselves entirely to one class of work ; and in consequence 
agriculture, even under the English system, cannot move fast 
in the direction of the methods of manufacture. 

But yet there are considerable forces tending to push it 
in that direction. The progress of invention is constantly 
increasmg the number of serviceable, but expensive machines 
tor most of which a small farmer can find employment durin- 
only a very short time. He may hire some of them from 
people who make it their business to undertake steam plou-h- 
mg and thrashing ; but there are many, the use of which can 
be got only by co-operation with his neighbours; and the 
uncertainties of the weather prevent this plan from workin- 
very smoothly in practice. '^ 

Again, the farmer must go beyond the results of his own 
It affords an ^^^ ^"^ father's experience in order to keep 

icope'fiTAigh tf^^'* ^* *^^ ^^'-^^^^^ ^^ the day. He should be 
business able to follow the movements of acjricultural 

y- science and practice closely enough to see their 

chief practical applications to his own farm. To do all this 
properly requires a trained and versatile mind ; and a farmer 
who has these qualities could find time to direct the General 
course of the management of several hundred, or even of 
several thousand acres ; and the mere superintendence of his 
mens work in matters of detail is not a task fitting for him 
Ihe work which he ought to do is as difficult as that of a 
large manufacturer; and he would never dream of spending, 
his own strength on minute supervision which he can easily 



hire subordinates to do. A farmer who can do this higher 
work, must be wasting his strength on work that is beneath 
him, unless he employs many gangs of workmen, each of them 
under a responsible foreman. But there are not many fanns 
which give scope for this, and there is therefore very little 
inducement for really able men to enter the business of 
farming ; the best enterprise and ability of the country gene- 
rally avoid agriculture and go to trades in which there is 
room for a man of first-rate ability to do nothing but high 
class work, to do a great deal of it, and therefore to get high 
Earnings of Management. 

The experiment of working fanns on a very large scale is 
difficult and expensive ; because, to be tried properly, it would 
require farm buildings and means of communication specially 
adapted to it ; and it would have to overcome a good deal of 
resistance from custom and sentiment not altogether of an 
unhealthy kind. The risk also would be great; for in such 
cases those who pioneer often fail, though their route when 
well trodden may be found to l>e the easiest and best. 

If a farm is not very large, and if, as is often the case, the 
farmer has no greater ability and activity of ^^^ farmer 
mind than is commonly to be found among the who works 

, . . ^ n 1 • i> • £ i. w^ith his men. 

better class of working toremen m manuiactures, 
then it would be best for others, and in the long run for him- 
self, that he should return to the old plan of working among 
his men. Perhaps also his wife might return to some of those 
liffhter tasks in and near the farmhouse which tradition 
ascribes to her. They require discretion and judgment, they 
are not inconsistent with education and culture; and combined 
with it they would raise and not lower the tone of her life, 
and her real claims to a good social position. There is some 
reason for thinking that the stern action of the principle of 
natural selection is now displacing those farmers, who have 
not the faculty to do difficult head-work, and yet decline to 
do hand-work. Their places are being taken by men of more 



BOOK vr. CH. X. S§ 4, 5. 

than average natural ability who, with the help of modern 
education, are rising from the ranks of labourers; who are 
quite able to manage the ordinary routine work of a model 
farm; and who are giving to it a new life and spirit by 
calling their men to come and work, instead of telling them 
to go and work. Veiy large farms being left out of view, it 
is with rather small farms worked on these principles that 
the immediate future of English agriculture seems to lie. 
Very small Very Small holdings however have great advan- 
hoidmgs. ^.^ggg wherever so much care has to be given to 
individual plants, that machinery is out of place ; and there 
is reason for hoping that they will continue to hold their own 
in raising vegetables, flowers and fi-uit. 

§ 5. We may next consider how far landlords will in 
The interests *^^"' ^"^'^ interest adjust the size of holdings to 
of landlords the real needs of the people. Small holdino-s 

of the i»i . t> 

and of the ^r- . * * o" 

otten require more expensive buildings, roads 

as re- 

public _ 

howrngs.'"*" ^^"^ ^^"^""^^^ ^^^^ involve' greater troubll and in- 
cidental expenses of management to the land- 
lord in proportion to their acreage than do large holdings ; 
and while a large fanner who has some rich land can turn 
poor soils to good account, small holdings will not flourish 
generally except on good soil '. Their gross rental per acre 
must therefore always be at a higher rate than that of large 
farms. But it is contended that, especially when land is 
heavily burdened by settlements, landlords are unwilling to 
incur the expense of subdividing farms, unless they see their 
way to rents for small holdings that will give them, in 
addition to high profits on their outlay, a heavy insurance 

1 The iiiteri>retation of this term varies with local conditions and individual 
wants. On permanent pasture land near a town or an industrial district the 
advantages of smaU holdings are perhaps at their maximum, and the disad- 
vantages at their mmimum. If the land is arahle, it must not be light but 
strong, and the richer the better ; and this is especially the case with holdings 
so small as to make much use of the spade. If the land is hiUy and broken 
the smaU cultivator loses but little from his want of command of machinery 



fund against the chance of having to throw the holdings 
together again ; and that the rental for small holdings, and 
especially for those of only a few acres, is extravagantly high 
in many parts of the country. Sometimes the prejudices of the 
landloitl and his desire for undisputed authority make him 
positively refuse to sell or let land to persons who are not in 
haimony with him on social, political or religious questions; 
but it seems certain that evils of this kind have always 
been confined to a few districts, and that they are rapidly 

But they rightly attract much attention. For there is a 
public need for small holdings, as well as large, in every 
district. They increase the number of people who are 
working in the open air with their heads and their hands : and 
by giving the agricultural labourer a stepping-stone upwards, 
they tend to prevent him from being compelled to leave agri- 
culture to find some scope for his ambition, and thus check 
the great evil of the continued flow of the ablest and bravest 
farm lads to the towns. 

Moreover very small holdings, which can be worked by 
people who have some other occupation, and also 
allotments and large gardens, render great services 
to the State, as well as to those who cultivate them. They 
break the monotony of existence, they give a healthy change 
from indoor life, they offer scope for variety of character and 
for the play of fancy and imagination in the arrangement of 
individual life ; they afford a counter attraction to the grosser 
and baser pleasures ; they often enable a family to hold 
together that would otherwise have to separate ; under 
favourable conditions they improve considerably the material 
condition of the worker ; and they diminish the fretting as 
well as the positive loss caused by the inevitable interruptions 
of their ordinary work. 

And lastly though peasant proprietorship, as a system, is 
unsuited to the economic conditions of England, to her soil, 






BOOK VI. CH. X. g 5, 6. 

her climate and the temper of her people, yet there are a few 

There should Peasant proprietors in England who are nerfectlv 
be no artificial ]|.ir»r»Ar i« +k:„ tj.* , , ^^ ^ 

hindrances to '"PP^ '" ^'^ condition; and there are a few 

peasants- pro- others who would buy small plots of land and 
would live happily on them, if they could get just 
what they wanted where they wanted it. Their temper is 
such that they do not mind working hard and living sparely 
p.-oyided they need call no one master; they love quiet and 
dLshke excitement ; and they have a great capacity for g«>win<- 
fond of land>. Reasonable opportunity should be given t^ 
such people to invest their savings in small plots of land on 
which they may raise suitable crops with their own hands • 
and at the very least the present grievous legal charges on the' 
transfer of small plots should be diminished. 

Co-operation might seem likely to flourish in agriculture 

fn-rSture f "'^ *° T^'"' *•'" economies of production on a 

• large scale with many of the joys and the social 

gams of small properties. But it requires habits of mutual 

trust and confidence; and unfortunately the bravest and the 

boldest and therefore the most trustful, of the countrymen 

have always moved to the towns, and agriculturists are a 

suspicious race. Co-operative movements in agriculture there- 

fore must needs be very cautious, until the way has been well 

prepared for them by the less ambitious but safer .system of 

profit-sharing. ■' 

As co-operation might combine more of the advantages 
of all systems of tenure, so the cottier system of Ireland often 
combmed the disadvantages of all ; but its won,t evils and 
their causes are rapidly disappearing, and the economic ele- 
ments of the problem are just now overshadowed by the 
political. We must therefore pass it hy'. 

tl^leZZ^'Tuo^^T'^ ■""" '" "^"^ *" «"'" ^""^ '» '^' -- over 



§ 6. Finally a word may be said as to private and public 
interests with regard to open spaces in towns. 
Wakefield and the American economists have tweei^Vbitc 
taught us how a sparsely inhabited new district fJ'^^^g^P^"''*^^ 
is enriched by the advent of every new settler, the matter of 
The converse truth is that a closely peopled ^p^^fj^p^^eJ!" 
district is impoverished by everyone who adds a 
new building or raises an old one higher. The want of air 
and light, of peaceful repose out-of-doors for all ages and of 
healthy play for children, exhausts the energies of the best 
blood of England which is constantly flowing towards our 
large towns. By allowing vacant spaces to be built on reck- 
lessly we are committing a great blunder from a business 
point of view, since for the sake of a little material wealth 
we are wasting those energies which are the factors of pro- 
duction of all wealth; and we are sacrificing those ends 
towards which material wealth is only a means. It is a 
difficult question to decide how far the expense of clearing 
open spaces in land already built on should fall on the 
neighbouring owners ; but it seems right that for the future 
every new building erected, save in the open country, should 
be required to contribute in money or in kind towards the 
expenses of open places in its neighbourhood. 

arise partly from the difficulty of deciding what are normal prices and harvests; 
partly from local variations in the standard of normal farming skill and enter- 
prise. On this and some allied questions relating to compensation for 
improvements, see Frinciples VI. x. 10. 





noi L J''\7T"''l^ f *^ P'""^'"S *«" chapters may 
no^ be brought to a head. It falls far short of a complete 

Stl'teff •^TT'"'T"^= for that involves qu^t 
^ntl?tr>:^ fl ' *° «"<'*-*-- of credit and employ, 
m Its many forms. But yet it extends to the broadest and 
deepest mfluences which govern distribution and exchange. 

To begin with, we have seen that there is a ..eneral 
correspondence between the causes that govern the CppS 
prices of material and of pei^onal capital : the ^ 

motives which induce a man to accumulate of°cTdSns 
personal capital in his son's education, are t'.ZT^ 
similar te those which control his accumulation '"«'ri«i. 
of material capital for his son. There is a con- tn^l^H^T'' 
tmuous transition from the father who works '^""'"e- 
and waite in order that he may bequeath to his son a 
nch and firmly-established manufacturing or trading business 
to one who works and waits in o«ler to support his son wh7e 
he IS slowly acquiring a thorough medical education, and 
ultimately to buy for him a lucrative practice. Again, there 
.s the same continuous transition from him to one ^ho work 
and waits in order that his son may stay long at school ; and 
may afterwards work for some time abnost without pay ^S 



learning a skilled trade, instead of being forced to support 
himself early in an unskilled occupation, such as that of an 
errand-boy. For such occupations, because they lead the way 
to no future advance, sometimes offer comparatively high 
wages to young lads. 

It is indeed true that as society is now constituted, the 
only persons, who are very likely to invest much in developing 
the personal capital of a youth's abiUties are his parents : and 
that many first-rate abilities go for ever uncultivated because 
no one, who can develop them, has had any special interest 
in doing so. This fact is very important practically, for its 
effects are cumulative ; that is, the deficiency in education of 
one generation is likely to impair the education of the next, 
and that again of the generation which follows it, and so 
on, cumulatively. But it does not give rise, as has been 
supposed, to a fundamental difference between material and 
human agents of production : for it is analogous to the fact 
that much good land is poorly cultivated because those who 
would cultivate it well have not access to it. 

Again, since human beings grow up slowly and are slowly 
worn out, and parents in choosing an occupation for their 
children must as a rule look forward a whole generation, 
changes in demand take a longer time to work out their full 
effects on supply in the case of human agents than of most 
kinds of material appliances for production; and a specially 
long period is required in the case of labour to give full play 
to the economic forces which tend to bring about a normal 
adjustment between demand and supply^. 

§ 2. The eflficiency of human agents of production on 

the one hand, and that of material agents on the . 

' ^ Business men 

other, are weighed against one another and com- weigh the 
pared with their costs; and each tends to be the^different 
applied as far as it is more efficient than the other industrial 
in proportion to its cost. A chief function of 

1 Comp. IV. V. VI. VII. and xii. ; and VI. iv. v. aud vii. 


BOOK VL CH. XI. §§ 2, 3. 

business enterprise is to facilitate the free action of fh" 
S^t principle of substitution. Generally toZ S^ L^ 

a./n ^-^leaTnTsnie^Ti^^^^^^ 
and managers; they are constantly devising and experiment 
ng new arrangements which involve the use ofTff^nt 

sreivtr-"^"'^ ^"'^ ^^'-"'^"^ *••- -- profits: 

cla.frfti?"''"r'"^'^ "'*^ ^''^ ""^t °^ almost eve>y 
c^s of labour, ,s thus continually being weighed in the 

:S«f.o .he ^^^'"'t '" "■'^ «■• -"ore branches of production 

'uruSiol ofZ '^'°! °*"'' "^^'"^ °* l'^'^'"--- ^°d each 
.on. of these m its turn against others. This comoe 
tition IS primarilv "vertiVal .» ,-(. • i , » compe- 

i- ui,»niy vertical : it is a struggle for the fiplrl n( 

, 10 were, Detween the same vertical walls TJnf 
meanwhile "horizontal" competition is always at ^rk !nd 
by simpler methods : for, fii^tly, there is great fre^om of 
movement of adulte from one business to another withinLl 
We; and secondly, parents can generally introduce th^r 
children into almost any other trade of the same grade wfth 
their own in their neighbourhood. By means of this'^ombrne; 
vertical and horizontal competition there is an effective and 
closely adjusted balance of payments to services ^ttwe^a 
abour m different g.-ades; i„ spite of the fa.t that the laW 
m any one grade is mostly recruited even now from the 
children of those in the same grade ^ 

. ,"^1 """^^S of the principle of substitution is thus chiefly 
mdirect. When two Unks containing fluid are joined bv a the fluid, which is near the pipf i„ the LTwth^he 
h.sher level, will flow into the other, even though it Trtther 

1 Compare VI. i. 6, and vn. 2. 
a Compare IV. vi. 5 ; and VI. v. 2. 



viscous; and thus the general levels of the tanks will tend 
to be brought together, though no fluid may flow from the 
further end of the one to the further end of the other ; and 
if several tanks are connected by pipes, the fluid in all 
will tend to the same level, though some taaks have no 
direct connection with others. And similarly the principle 
of substitution is constantly tending by indirect routes to 
apportion earnings to efficiency between trades, and even 
between grades, which are not directly in contact with one 
another, and which appear at first sight to have no way of 
competing with one another. 

§ 3. There is no breach of continuity as we ascend from 
the unskilled labourer to the skilled, thence to the foreman, 
to the head of a department, to the general But as regards 
manager of a large business paid partly by a the work of 
share of the profits, to the junior partner, and themselves 
lastly to the head partner of a large private fs"?e^st*h?ih" 
business : and in a joint-stock company there is organized, 
even somewhat of an anti-climax when we pass from the 
directors to the ordinary shareholders, who undertake the 
chief ultimate risks of the business. Nevertheless business 
men, those who undertake business enterprises, are to a 
certain extent a class apart. 

For while it is through their conscious agency that the 
principle of substitution chiefly works in balancing one factor 
of production against another ; with regard to them it has no 
other agency than the indirect influence of their own com- 
petition. So it works blindly, or rather wastefully ; it forces 
many to succumb who might have done excellent work if 
they had been favoured at first : and, in conjunction with the 
law of increasing return, it strengthens those who are strong, 
and hands over the businesses of the weak to those who have 
already obtained a partial monopoly. 

But on the other hand there is also a constant increase 
in the forces which tend to break up old monopolies, and 

^ 21 


BOOK VI. CH. XI. §§ 3, 4. 

to offer to men, who have but little capital of their own, 
openings both for starting new businesses and for rising into 
posts of command in large public and private concerns ; and 
these forces tend to put business ability in command of the 
capital required to give it scope. 

On the whole the work of business management is done 
cheaply — not indeed as cheaply as it may be in the future 
when men's collective instincts, their sense of duty and their 
public spirit are more fully developed; when society exerts 
itself more to develop the latent faculties of those who are 
lx)m in a humble station of life, and to diminish the secrecy 
of business ; and when the more wasteful forms of speculation 
and of competition are held in check. But yet it is done 
so cheaply as to contribute to production more than the 
equivalent of its pay. For the business undertaker, like the 
skilled artisan, renders services which society needs, and 
which it would probably have to get done at a higher cost 
if he were not there to do them^ 

The ablest business men are generally those who get the 
higliest profits, and at the same time do their work most 
cheaply ; and it would be as wasteful if society were to give 
their work to inferior people who would undertake to do it 
more cheaply, as it would be to give a valuable diamond to be 
cut by a low waged but unskilled cutter. 

The similarity between the causes that determine the 
normal rewards of ordinary ability on the one hand, and of 
business power in command of capital on the 
other, does not extend to the fluctuations of 
their current earnings. For the employer stands 
as a buffer between the buyer of goods and all 
the various classes of labour by which they are 

1 We postpone a criticism of the coutention of the socialists that it would 
be better for the State to take the work into its own hands and hire business 
managers to conduct it : and we postpone a study of those forms of specula- 
tion and commercial competition which are not beneficial to society, and 
perhaps are even harmful. 

of current 
profits and 



made. He receives the whole price of the one and pays the 
whole price of the others. The fluctuations of his profits 
go with fluctuations of the prices of the things he sells, 
and are more extensive: while those of the wages of his 
employees come later and are less extensive. The earnin^^s 
at any particular time of his capital and ability are some- 
times large, but sometimes also a negative quantity : whereas 
those of the ability of his employees are never very largo, 
and are never a negative quantity. The wage-receiver is 
likely to suffer much when out of work ; but that is because 
he has no reserve, not because he is a wage-receiver'. 

§ 4. Returning to the point of view of the second chapter 
of this Book, we may call to mind the double relation in 
which the various agents of production stand to one another. 
On the one hand they are often rivals for em- The agents 
ployment; any one that is more efficient than of production 
another in proportion to its cost tending to be source^ oT ^ 
substituted for it, and thus limiting the demand ^T one"'^''* 
price for the other. And on the other hand another, 
they all constitute the field of employment for each other: 
there is no field of employment for any one, except in so far 
as it is provided by the others : the national dividend which 
is the joint product of all, and which increases with the supply 
of each of them, is also the sole source of demand for each 
of them. 

Thus an increase of material capital causes it to push its 
way into new uses ; and though in so doing it may occasion- 
ally diminish the field of employment for manual labour in a 
few trades, yet on the whole it will very much „ 

, •' novr an 

increase the demand for manual labour and all increase 
other agents of production. For it will much enriches^the 
increase the national dividend, which is the ^^^^ ^°'' ^^^ 

- ,, - , „' employment 

common source of the demand for all ; and since of labour. 

1 Compare VI. iv. 6. 




4, 5. 

by its increased competition for employment it will have 
forced down the rate of interest, therefore tlie joint product 
of a dose of capital and labour will now be divided more in 
favour of labour than before. Thus, the chief benefit which 
capital confers upon labour is not by opening out to it new 
employments, but by increasing the joint product of land, 
labour and capital (or of land, labour and waiting), and by 
reducing the share of that product which any given amount 
of capital (or of waiting) can claim as its reward \ 

§ 5. In discussing the influence which a change in the 
supply of work of any one industrial group exerts on the 
field of employment for other kinds of labour, there was no 
need to raise the question whether the increase 
of work came from an increase in the numbers 
or in the efficiency of those in the group : for 
that question is of no direct concern to the 
others. In either case there is the same ad- 
dition to the national dividend : in either case 
competition will compel them to force themselves 
to the same extent into uses in which their marginal utility is 
lower ; and will thus lessen to the same extent the share of 
the joint product which they are able to claim in return for 
a given amount of work of a given kind. 

1 The new demand for labour will partly take the form of the opening-out 
of new undertakings which hitherto could not have paid their way. It will, 
for instance, lead to the making of railways and waterworks in districts which 
are not very rich, and which would have continued to drag their goods along 
rough roads, and draw up their water from wells, if people had not been able 
and wilhng to support labour while making railway embankments and water 
conduits, and to wait for the fruits of their investment long and for a relatively 
low reward. 

Another part .of this new demand for labour will come from the makers of 
new and more expensive machinery in all branches of production. For when 
it is said that machmery is substituted for labour, this means that one class of 
labour combined with much waiting is substituted for another combined with 
less waiting : and for this reason alone, it would be impossible to substitute 
capital for labour in general, except indeed locally by the importation of 
capital from other places. 

in number 
or efficiency 
of any group 
of workers 
in relation 
to wages of 
and others. 

I'.i •* 



: f. '^ 

But the question is of vital importance to the members 
of that group. For, if the change is an increase of one-tenth 
in their average efficiency, then each ten of them will have 
as high an aggregate income as each eleven of them would 
have if their numbers had increased by one-tenth, their 
efficiency remaining unchanged. 

We shall have to look at some other aspects of this 
question in the next chapter while discussing the relative 
merits of increased leisure and increased material production 
as aims of progress. 

ii M 

1 l\ 





§ 1. The field of employment which any place oifers for 

labour and capital depends firstly on its natural 
employment resources ; secondly, on the power of turning 
labouJ" ^ *" *^®"^ *^ S^^ account, derived from its progress 

in knowledge and in social and industrial organi- 
zation ; and thirdly, on the access that it has to markets in 
which it can sell those things of which it has a superfluity. 
The importance of this last condition is often underrated ; but 
it stands out prominently when we look at the history of new 

It is commonly said that wherever there is abundance of 

good land to be had free of rent, and the climate 
rich in new*^^ ^^ not Unhealthy, the real earnings of labour and 
which have no *^® interest on capital must both be high. But 
good access to this is Only partially true. The early colonists of 
the Old World. America lived very hardly. Nature gave them 

wood and meat almost free : but they had very 
few of the comforts and luxuries of life. And even now there 
are, especially in South America and Afnca, many places to 
which Nature has been abundantly generous, which are never- 
theless shunned by labour and capital, because they have no 
ready communications with the rest of the world. On the 
other hand high rewards may be ofiered to capital and labour 
by a mining district in the midst of an alkaline desert, when 
once communications have been opened up with the outer 
world, or again by a trading centre on a barren sea-coast; 
though, if limited to their own resources, they could support 



but a scanty population, and that in abject poverty. And the 
splendid markets which the Old World has offered to the 
products of the New, since the growth of steam-communi- 
cation, have rendered North America and Australia the 
richest large fields for the employment of capital and labour 
that there have ever been. 

But after all the chief cause of the modern prosperity of 
new countries lies in the markets that the old ,„«.„•.„ 

Old countries 

world offers, not for goods delivered on the spot, offer a market 
but for promises to deliver goods at a distant Jfthefuturefn- 
date. A handful of colonists having assumed comes of a new 

, £ country, 

rights of perpetual property in vast tracts oi 
rich land, are anxious to reap in their own generation its 
future fruits ; and as they cannot do this directly, they do it 
indirectly, by selling in return for the ready goods of the old 
world promises to pay much larger quantities of the goods 
that their own soil will produce in a future 
generation, in one lorm or another tliey mort- sequent influx 
gage their new property to the old world at °l^^^^^^^ *"*° 
a very high rate of interest. Englishmen and 
others, who have accumulated the means of present enjoy- 
ment, hasten to barter them for larger promises in the future 
than they can get at home : a vast stream of capital flows 
to the new country, and its arrival there raises the rate of 
wages very high. The new capital filters but slowly towards 
the outlying districts : it is so scarce there, and so many 
persons are eager to have it, that it has often commanded for a 
long time two per cent, a month, from which it has fallen by 
gradual stages down to six, or perhaps even five per cent., a 

For the settlers being full of enterprise, and seeing their 
way to acquiring private title-deeds to property ^^.^^^ nominal 
that will shortly be of great value, are eager to wages very 
become independent undertakers, and if possible '^ 
employers of others ; so wage-earners have to be attracted by 






high wages, which are paid in a great measure out of the com- 
modities borrowed from the old world on mortgages, or in 
other ways. It is, however, difficult to estimate exactly the real 
rate of wages in outlying parts of new countries. The workers 
are picked men with a natural bias towards adventure ; hardy, 
resolute, and enterprising ; men in the prime of life, who do 
not know what illness is ; and the strain of one kind and 
another which they go through, is more than the average 
English, and much more than the average European labourer 
could sustain. There are no poor among them, because there 
are none who are weak : if anyone becomes ailing, he is forced 
to retire to some more thickly-peopled place where there is 
less to be earned, but where also a quieter and less straining 
life is possible. Their earnings are very high if reckoned in 
money ; but they have to buy at very high prices, or altogether 
dispense with, many of the comforts and luxuries which they 
would have obtained freely, or at low prices, if they had lived 
in more settled places. It is however true that many of 
these things are of but little real utility, and can be easily 
foregone, where no one has them and no one expects them. 

As population increases, the best situations being already 
As tim. c.n« ^^^"Pi®^' nature gives generally less return of 
on though the raw produce to the marginal effort of the culti- 
m^Zshfng rI: ^^*^^« ^ ^^^ this tends a little to lower wages, 
turn may not But even in agriculture the Law of Increasing 

be acting very t> j. • , o 

strongly, ±letum IS Constantly contending with that of 

Diminishing Return, and many of the lands 
which were neglected at first, give a generous response to 
careful cultivation ; and meanwhile the development of roads 
and raUroads, and the growth of varied markets and varied 
industries, render possible innumerable economies in pro- 
duction. Thus the actions of the Laws of Increasing and 
Diminishing Return appear pretty well balanced, sometimes 
the one, sometimes the otlier being the stronger. There is 
no reason so far why the wages of labour (of a given effici- 




ency) should fall. For if, taking one thing with another, the 
Law of Production is that of Constant Return, there will be 
no change in the reward to be divided between a dose of 
capital and labour ; that is, between capital and labour work- 
ing together in the same proportions as before. And, since 
the rate of interest has fallen, the share which capital takes of 
this stationary joint reward is less than before ; and therefore 
the amount of it remaining for labour is greater'. 

But whether the Law of production of commodities be 
one of Constant Return or not, that of the pro- 
duction of new title-deeds to land is one of capital be- 
rapidly Diminisning Return. The influx of '=°T^ f^^*' 

p . •11 tively slower 

loreign capital, though perhaps as great as ever, and wages tend 
becomes less in proportion to the population; *° ^ * 
wages are no longer paid largely with commodities borrowed 
from the old world : and this is the chief reason of the sub- 
sequent fall in Real Efficiency wages ; that is, in the neces- 
saries, comforts and luxuries of life which can be earned by 
Avork of a given efficiency. But there are two other causes 
tending to lower average daily wages measured in money. 
The first is, that as the comforts and luxuries of civilization 
increase, the average efficiency of labour is lowered by the 
influx of immigrants of a less sturdy character than the earlier 
settlers. And the second is, that many of these new comforts 
and luxuries do not enter directly into money wage, but are 
an addition to it^. 

1 Of course the aggregate share of capital may have increased. For 
instance, while labour has doubled capital may have quadrupled, and the rate 
of interest may be two-thirds of what it was : and then, though each dose of 
capital gets a lower reward by one-third, and leaves for labour a larger 
share of the joint product of a dose of capital and labour, the aggregate share 
of capital will have risen in the ratio of eight to three. Much of the argument 
of Ml- Henry George's Progress and Poverty is vitiated by his having over- 
looked this distinction. 

2 We took account of them when arriving at the conclusion that the action 
of the Law of Increasing Eeturn would on the whole countervail that of 
Diminishhig Eeturn : and we ought to count them in at their full value when 


BOOK VI. CH. XII. § 2. 

i ^ 


§ 2. The influence which access to distant markets exerts 
on the growth of the National Dividend has been conspicu- 
ous in the history of England also. 

For more than a hundred years she has pursued with 

energy those manufacturing industries which 

exchanged S^^^ ^^ Increasing Return to increasing capital 

manufactures and labour. She has exported ffoods that are 

for goods that j i . 

obey the Law made the more easily, the larger the scale on 

Re^ulTn^"'*^'"^ ^^i«^ they a^e produced, in exchange for some 
raw produce that could not be easily raised in 
her own climate, and for some grain and meat which she 
could not have produced for herself, except by a cultivation 
of 'her land so intensive as to call the Law of Diminishinff 


Return strongly into operation. For a long time her exports 

met with little effective competition. But as the century 

wore on, other nations developed their manufactures, and 

Englishmen are no longer able to set in return 

Shehasgradu- „ v i i? t 

ally lost her loi', Say, a bale or cahco as much of the products 
partial mono- ^^f backward countries as before. At one time 

they could get for the calico nearly as much as 
would have the same cost of production in that backward 
country as a similar bale ; and every improvement in England's 
arts of manufacture would have increased considerably the 
amount of foreign goods she could have brought back in 

return for the product of a given quantity of 

and now gains i i, , -^1^.. 

but little so far "®^ ^^^^ labour and capital. But now every im- 
rs*^°Jn«rned'** provement in manufacture spreads itself quickly 
from improve- over the Western World, and causes additional 
ufactur" "**"' ^^l^s of cotton to be offered to backward coun- 
tries at a cheaper and still cheaper rate. Those 

tracing the changes in Real wages. Many historians have compared wages at 
different elKK-hs with exclusive reference to those things which have always 
been in connnon consumption. But from the nature of the case, it is just 
these things to which the Law of Diminishing Return applies ; and which tend 
to become scarce as population increases. The view thus got is one-sided and 
misleading in its general effect. 



countries gain much, while England herself gains but little 
from the improvement and the cheapening of the manufacture 
of the goods that she sends them. 

And she fares even worse with the goods that she sends to 
other manufacturing countries and especially to America. 
The amount of wheat which can be bought in Illinois with a 
ton of steel cannot be more than the produce of as much 
capital and labour as Avould make a ton of steel in Illinois by 
the new processes; and therefore it has fallen in the same 
proportion as the efficiency of English and American labour 
in making steel has increased. It is for this reason, as well 
as because of the heavy tariffs levied on her goods by many 
countries, that in spite of England's large trade, the progress 
of invention in the manufacturing arts has added less than 
might have been otherwise expected to her real National 
Income or Dividend. 

It is no slight gain that she can make cheaply clothes 
and furniture and other commodities for her own use : but 
those improvements in the arts of manufacture which she 
has shared with other nations, have not directly increased 
the amount of raw produce which she can obtain from other 
countries with the product of a given quantity of her own 
capital and labour. Probably more than three-fourths of the 
whole benefit she has derived from the progress of manu- 
facture during the present century has been g^^ g. 
through its indirect influences in lowering the much from the 
cost of transport of men and goods, of water and tra*nspTrt"of° 
light, of electricity and news ; for the dominant various kinds 
economic fact of our own age is the development not of 
the Manufacturing, but of the Transport industries. It 
is these that are growing most rapidly in aggregate volume 
and in individual power, and which are giving rise to 
most anxious questions as to the tendencies of large capitals 
to turn the forces of economic freedom to the destruction 
of that freedom : but, on the other hand, it is they also which 


BOOK VI. CH. Xll. ^ 2, 3. 

have done by far the most towards increasing England's 

One effect of this cheapening of transport has been that, 
while a century ago the goods which England gained by 
foreign trade were chiefly the luxuries of the well-to-do, they 
now consist largely of bulky commodities and especially 'wheat 

which have "^""^ ^*^^'' ^'''^^ ^^ ^""Pl^ ^<^- ^nd thus 
told especially although England's gains from her foreign trade 

common"food:' "^^3^. ^^^ ^^^'« ^een increasing quite in pro- 
portion to the great increase in its volume, the 
additions which it has made to the real purchasing power of 
the wages of the working classes have been very great and 
constantly increasing. 

§ 3. The influence, which the improvement of the means 

Influence of *^^ *^® ^^^ ^^ transport has exerted in this 

faboTr'%°a"iies ^^^^^*i^^' ^^^ ^een aided by two great changes. 

of some leading The first is the adoption of Free Trade in the 

"z'^r:?^!"" "^^^^ <>f this century; and the second is the 

subsequent development of the Mississippi valley 

and the Far West of America, which are especially suited for 

^ growing the grain and the meat, that constitute the chief 

' food of the English working man. 

The only parts of America that were thickly peopled fifty 
years ago were ill-suited for growing wheat ; and the cost of 
carrying it great distances by land was prohibitive. The 
labour value of wheat— that is the amount of labour which will 
purchase a peck of wheat— was then at its highest point, and 
now is at its lowest. It would appear that agricultural wages 
have been generally below a peck of wheat a day ; but that 
in the first half of the eighteenth century they were about a 
peck, in the fifteenth a peck and a half or perhaps a little 
more, while now they are two or three pecks \ 

1 Rogers' estimates for the Middle Ages are higher: but he seems to Imve 
of I!!p wirT^'% n' "^r^/^^^^red part of the population as representative 
of the wliole. In the Middle Ages, even after a fairly good harvest, the 




house room, 

It is true that, where population is very sparse, nature 
sui^plies grass and therefore animal food almost 
gratis; and in South America beggars pursue 
their calling on horseback. During the Middle Ages however 
the population of England was always dense enough to give 
a considerable labour value to meat, though it was of poor 
quality'. A century ago very little meat was eaten by the 
working classes ; while now, though its price is a little higher 
than it was then, they probably consume more of it, on the 
average, than at any other time in English history. 

Turning next to the rent of house room, we find that 
ground-rents in towns have risen, both extensively 
and intensively. For an increasing part of the 
population is living in houses on which ground-rents at an 
urban scale have to be paid, and that scale is rising. But 
house rent proper, that is what remains of the total rent after 
deducting the full rental value of the ground, is probably 
little, if at all, higher than at any previous time for similar 
accommodation ; for the rate of profits on the turnover which 
is earned by capital engaged in building is now low, and the 
labour cost of building materials has not much altered. And 
it must be remembered that those who pay the high town 
rents get in return the amusements and other advantages of 
modem town life, which many of them would not be willing 
to forego for the sake of a much greater gain than their total 

wheat was of a lower quality than the ordinary wheat of to-day ; while after 
a bad harvest much of it was so musty that now-a-days it would not be eaten 
at all ; and the wheat seldom became bread without paying a high monopoly 
charge to the mill belonging to the lord of the manor. 

1 For cattle, though only about a fifth as heavy as now, had very large 
frames : their flesh was chiefly in tliose parts from which the coarsest joints 
come ; and since they were nearly starved in the winter and fed up quickly on 
the summer grass, the meat contamed a large percentage of water, and lost a 
great part of its weight in cooking. At the end of the summer they were 
slaughtered and salted: and salt was dear. Even the well-to-do scarcely 
tasted fresh meat during the winter. 






The labour value of wood, though lower than at the 
beginning of the century, is higher than in the Middle Ages : 
but that of mud, brick or stone walls has not much changed ; 
while that of iron — to say nothing of glass — has fallen much. 

And indeed the popular belief that house rent proper has 
risen, appears to be due to an imperfect acquaintance with 
the way in which our forefathers were really housed. The 
modern suburban artisan's cottage contains sleeping accom- 
modation far superior to that of the gentry in the Middle 
Ages ; and the working classes had then no other beds than 
loose straw, reeking with vermin, and resting on damp mud 
floors. But even these were probably less unwholesome, 
when bare and shared between human beings and live stock, 
than when an attempt at respectability covered them with 
rushes, which were nearly always vile with long accumulated 
refuse. It is undeniable that the housing of the very poorest 
classes in our towns now is destructive both of body and 
soul : and that with our present knowledge and resources we 
have neither cause nor excuse for allowing it to continue. 
And it is true that in earlier times bad housing was in so far 
a less evil than now, as those who were badly housed by night 
had abundant fresh air by day. But a long series of records, 
ending with the evidence of Lord Shaftesbury and others 
before the recent Commission on the Housing of the Poor, 
establishes the fact that all the horrors of the worst dens of 
modern London had their counterpart in worse horrors of the 
lairs of the lowest stratum of society in every previous age. 
Fuel, like grass, is often a free gift of nature to a sparse 

fuel population; and during the Middle Ages the 

cottagers could generally, though not always, get 
the little brushwood fire needed to keep them warm as they 
huddled together round it in huts which had no chimney 
through which the heat could go to waste. But as population 
increased the scarcity of fuel pressed heavily on the working 
classes, and would have arrested England's progress altogether, 




had not coal been ready to take the place of wood as fuel for 
domestic purposes, as well as for smelting iron. It is now so 
cheap that even the comparatively poor can keep themselves 
warm indoors without living in an unwholesome and stupefy- 
ing atmosphere. 

This is one of the great services that coal has wrought 
for modern civilization. Another is to provide 
cheap under-clothing, without which cleanliness 
is impossible for the masses of the people in a cold climate : 
and that is perhaps the chief of the benefits that England has 
gained from the direct application of machinery to making 
commodities for her own use. Another, and not less im- 
poitant service, is to provide abundant water, 
even in large towns'; and another to supply, 
with the aid of mineral oil, that cheap and artificial light 
which is needed not only for some of man's work, 
but, what is of higher moment, for the good use of 
his evening leisure. To this group of requisites for a civilized 
life, derived from coal on the one hand, and modern means of 
transport on the other, we must add, as has just been noticed, 
the cheap and thorough means of communication news and 
of news and thought by steam-presses, by steam- favei. 
carried letters and steam-made facilities for travel. 

§ 4. We have seen that the National Dividend is at 
once the aggregate net product of, and the sole ^^^ .^^^^ 




source of payment for, all the agents of pro- of progress on 
duction within the country ; that the larger it is, ^^e chief a- 
the larger, other things being equal, will be the |^"J?jjJ*.*^ P™" 
share of each agent of production, and that an 
increase in the supply of any agent will generally lower its 
price, to the benefit of other agents. 

1 Primitive appliances will bring water from high ground to a few public 
fountains : but the omnipresent water supply which both in its coming and its 
gouig performs essential services for cleanliness and sanitation, would be im- 
possible without coal-driven steam-pumps and coal-made iron pipes. 


BOOK VI. CH. xir. §§ 4—6. 



This general principle is specially applicable to the case 
it has some- of land. An increase in the amount or pro- 
tl.T'Mre^o'^f d^cti^-eness of the land that supplies any market 

fJifurluan^d"' ^^^^"^^^ ^^ *^® ^^^^ instance to the benefit of 
those capitalists and workers who are in pos- 
session of other agents of production for the same market. 
And the influence on values which has been exerted in the 
modern age by the new means of transport is nowhere so 
conspicuous as in the history of land ; its value rises with 
every improvement in its communications with markets in 
which its produce can be sold, and its value falls with every 
new access to its own markets of produce from more distant 

But anything that promotes the prosperity of the people 

butnotofagri- P'"''^^*^^ ^^«<^ ^^ the long run that of the land- 
cuiturai and l^^ds of the soil. It is true that English rents 

"akentogJlher. ^^^'^ ^^^^ ^^^^ ^^en, at the beginning of this 
century, a series of bad harvests struck down a 
people that could not import their food ; but a rise so caused 
could not from the nature of the case have gone very much 
further. And the adoption of free trade in corn in the middle 
of the century, followed by the expansion of American wheat- 
fields, is rapidly raising the real value of the land urban and 
rural taken together; that is, it is raising the amount of the 
necessaries, comforts and luxuries of life which can be pur- 
chased by the aggregate rental of all the landowners urban 
and rural taken together \ 

i7o'^ ^^ f t?A*^*V^f ^^f ^t'^al (mo»ey) rent of England doubled between 
1795 and 1815, and then fell by a third till 1822 ; after that time it has been 
altemately nsing and faUing; and it is now about 45 or 50 millions as against 

^ *"! f '"!^'''"^ ^^'"''^ *^^ y^*' ^^^^' ^^^^» i* ^as at its highest. It was 
about 30 millions m 1810, 16 millions in 1770, and 6 miUions in 1600. But the 
rental of urban land in England is now rather greater than the rent of 
agricultural land : and in order to estunate the full gain of the landlords from 
the expansion of population and general progress, we must reckon in the 
values of the and on which there are now railroads, mines, docks, &c. Taken 
all together, the money rental of England's soil is probably twice as high and 



§ 5. Political Arithmetic may be said to have begun in 
England in the seventeenth century ; and from 

It li 3. s crrc 3 tl V 

that time onwards we find a constant and nearly increased the 
steady increase in the amount of accumulated supply of 

•^ ^ capital, 

wealth per head of the population. 

This increase of capital per head tended to diminish its 
marginal utility, and therefore the rate of interest and has lower- 
on new investments ; but not uniformly, because ^^ '** propor- 

\ ... tionate though 

there were meanwhile great variations in the not its total in- 
demand for capital, both for political and military '=°™*- 
and for industrial purposes. Thus the rate of interest which 
was vaguely reported to be 10 per cent, during a great part 
of the Middle Ages, had sunk to 3 per cent, in the earlier 
half of the eighteenth century ; but the immense industrial 
and political demand for capital raised it again, and it was 
relatively high during the great war. It fell as soon as the 
political drain had ceased ; but it rose again in the middle of 
this century, when railways and the development of the 
Western States of America and of Australia made a great 
new demand for capital. These new demands have not 
slackened; but the rate of interest is again falling fast, in 
consequence of the great recent accumulations of wealth in 
England, on the Continent, and above all in America. 

§ 6. The growth of general enlightenment and of a sense 
of responsibility towards the younsj has turned a 

. . . There is a re- 

great deal of the increasing wealth of the nation lative fall in 

from investment as Material capital to invest- JraiJed"abmt°^ 

ment as Personal capital. There has resulted a 

largely increased supply of trained abilities, which has much 

increased the National Dividend, and raised the average 

income of the whole people : but it has taken away from these 

its Real rental three or four times as high, as it was when the corn laws were 

Progress may lower the value of the appliances of production, when this 
can be separated from that of their sites ; but not of such things as railways, 
when the value of their sites is reckoned in. See Princii)les VI. xii. 7. 

M. 2.^ 



BOOK VI. CH. Xll. 

trained abilities much of tliat scarcity value which they used 
to possess, and has lowered their earnings not indeed absolute- 
ly, but relatively to the general advance ; and it has caused 
many occupations, which not long ago were accounted skilled, 
and which are still spoken of as skilled, to rank with unskilled 
labour as regards wages. 

A striking instance is that of writing. It is true that 
many kinds of office work require a rare combination of high 
mental and moral qualities ; but almost any one can be easily 
taught to do the work of a copying clerk, and probably there 
will soon be few men or women in England who cannot write 
fairly well. When all can write, the work of copying, which 
used to earn higher wages than almost any kind of manual 
labour, will rank among unskilled trades'. 

Again, a new branch of industry is often difficult simply 

. because it is unfamiliar : and men of great force 

Earnings m i i .n . , * 

old and fami- and skill are required to do work, which can be 

cupaUoi's u°nd ^^^^ ^^ "^^^ ^^ Ordinary capacity or even by 
to fall relative- women and children, when the track has once 
^y ^o t ose in ^^^^ ^^jj beaten : its wages are high at first, 
but they fall as it becomes familiar. And this 
has caused the rise of average wages to be underrated, because 
it so happens that many of the statistics, which seem typical 
of general movements of wages, are taken from trades which 
were comparatively new a generation or two ago, and are 
now within the grasp of men of much less real ability than 
those who pioneered the way for them 2. 

1 In fact the better kinds of artisan work educate a man more, and will be 
better paid than those kinds of clerk's work which call for neither judgment 
nor responsibility. And, as a rule, the best thing that an artisan can do for 
his son is to bring him up to do thoroughly the work that lies at his hand, so 
that he may understand the mechanical, chemical or other scientific principles 
that bear upon it; and may enter into the spirit of any new improvement that 
may be made in it. If his son should prove to have good natural abilities, he 
is far more likely to rise to a high position in the world from the bench of an 
ai-tisan than from the desk of a clerk. 

2 Comp. Bm)k iv. Ch vi. §§ 1» 2; and Ch. ix. especially § 3. As the trade 



The consequence of such changes as these is to increase 
the number of those employed in occupations which are 
called skilled, whether the term is now properly applied or 
not : and this constant increase in the numbers of workers in 
the higher classes of trades has caused the average of all 
labour to rise much faster than the average of representative 
wages in each trade \ 

In the middle ages, though some men of great ability 
remained artisans all their lives, and became artists ; yet as 
a class the artisans ranked more nearly with the 
unskilled labourers than they do now. At the A'"*'^*"^' 

... , •' wages 

beginning of the new industrial era a hundred 
years ago the artisans had lost much of their old artistic 
traditions and had not yet acquired that technical command 
over their instruments, that certainty and facility in the exact 
performance of difficult tasks which belong to the modern 
skilled artisan ; and observers early in this century were 
struck by the social gulf that was being opened out in their 

progresses, improvements in machineiy are sure to lighten the strain of ac- 
complishing any given task ; and therefore to lower task wages rapidly. But 
meanwhile the pace of the machinei-y, and the quantity of it put under the charge 
of each worker, may be increased so much that the total strain involved in the 
day's work is greater than before. On this subject employers and employed 
frequently differ. It is for instance certain that Time wages have risen hi the 
textile trades; but the employe's aver, in contradiction to the employers, that 
the strain imposed on them has increased more than in proportion; that is, 
that Efficiency-wages have fallen. In this controversy wages have l)een 
estimated in money; but when account is taken of the increase in the 
purchasing power of money there is no doubt that Real Efficiency- wages have 

1 This jTio^y be made clearer by an example. If there are 500 men in grade 
A earning 12s. a week, 400 in grade B earning 25s. and 100 in grade C earning 
40s. the average wages of the 1000 men are 20s. If after a time 300 from grade 
A have passed on to grade B, and 300 from grade B to grade C, the wages in 
each grade remaining stationary, then the average wages of the whole 
thousand men will be about 2Ss. &d. And even if the rate of wages in each 
grade had meanwhile fallen 10 per cent., the average wages of all would still 
bo about 25s. Gd., that is would have risen more than 25 per cent. Neglect 
of such facts as these, as Mr Giffen has pointed out, is apt to cause great 




BOOK VI. CH. Xll. S^ (), 7. 

own generation between tlie artisan and the unskilled labourer. 
, . , This social change was a consequence partly of 

rose relatively . ^ x r j 

to those of un- the increase of the wages of the artisan, which 
at^the begin"*^ ^^^® *^ about double those of the unskilled 
ning of the labourer ; and partly of the same cause that 
secured him his high wages, that is the great 
increase in the demand for highly skilled labour, especially in 
the metal trades, and the consequent rapid absorption of the 
strongest characters among the labourers and their children 
into the ranks of the artisans ; for the breaking down, just 
at that time, of the old exclusiveness of the artisans, had made 
them less than before an aristocracy by birth and more than 
but now that ^^^^^® ^^ aristocracy by worth. But about a 
tendency is re- generation ago, as has just been explained, some 


of the simpler forms of skilled trades began to 
lose their scarcity value, as their novelty wore off; and at the 
same time continually increasing demands began to be made 
on the ability of those in some trades, that are traditionally 
ranked as unskilled. The navvy for instance, and even the 
agricultural labourer, have often to be trusted with expensive 
and complicated machinery, whicli a little while ago was 
thought to belong only to the skilled trades, and the Real 
wages of these two representative occupations are rising 

Again, there are some skilled and responsible occupations, 
such as those of the head heaters and rollers in iron works, 
which require great physical strength, and involve much 
discomfort : and in them wages are very high. For the 

1 The rise of wages of agricultural labourers would be more striking than 
it is, did not the spread of modern notions to agricultural districts cause many 
of the ablest children bom there to leave the fields for the railway or the 
workshop, to become poUcemen, or to act as carters or porters in towns. 
Perhaps there is no stronger evidence of the benefits of modern education and 
economic progress than the fact that those who are left behind in the fields, 
though having less than an average share of natural abilities, are yet able to 
©aril much higher Eeal wages than their fathers. 




temper of the age makes those who can do high class work, 
and can earn good wages easily, refuse to undergo hardship, 
except for a very high reward. 

§ 7. We may next consider the changes in the relative 
wages of old and young men, of women and children. 

The conditions of industry change so fast that long expe- 
rience is in some trades almost a disadvantagre. 


■, . •, ' i> I! ^ 1 J^ •! There is a re- 

and m many it is ot tar less value than a quick- lative fall in 
ness in takin^: hold of new ideas and adapting ^^^ wages of 

^ " , 1 o elderly men; 

one's habits to new conditions. In these trades 
an elderly man finds it difficult to get employment except 
when trade is brisk, at all events if lie is a member of a 
union which will not allow him to work for less than the full 
wages of the district. In any case he is likely to earn less 
after he is fifty years old than before he is thirty ; and the 
knowledge of this is tempting artisans to follow the example 
of unskilled labourers, whose natural inclination to marry 
early has always been encouraged by the desire that their 
family expenses may begin to fall off before their own wages 
begin to shrink. Trades-unions are afraid that abuses might 
creep in if they allowed men "with grey hairs" to compete 
for employment at less than full wages ; but many of them 
are coming to see that it is to their own interest, as it 
certainly is to that of the community, that such men should 
not be forced to be idle. 

A second and even more injurious tendency of the same 
kind is that of the wages of children to rise 
relatively to those of their parents. Machinery the wages of 
has displaced many men, but not many boys ; °^^ ^"^ ^"^^' 
the customary restrictions which excluded them from some 
trades are giving way ; and these changes, together with the 
spread of education, while doing good in almost every other 
direction, are doing harm in this that they are enabling boys, 
and even girls, to set their parents at defiance and start in 
life on their own acciiunt. 







The wages of women are for similar reasons rising fast 
relatively to those of men. And this is a great 

and of women. . . - . , i -i i • 

gam in so far as it tends to develop their 
faculties ; but an injury in so far as it tempts them to neglect 
their duty of building up a true home, and of investing their 
efforts in the Personal capital of their children's character and 

8. The relative fall in the incomes to be earned by 

moderate ability, however carefully trained, is 
o "^exc'ep'tiona! ^accentuated by the rise in those that are obtained 
genius are ris- \)y many men of extraordinary ability. There 


never was a time at which moderately good oil 
paintings sold more cheaply than now, and there never was a 
time at which first-rate paintings sold so dearly. A business 
man of average ability and average good fortune gets now a 
lower rate of profits on his capital than at any previous time ; 
while yet the operations, in which a man exceptionally 
favoured by genius and good luck can take part, are so 
extensive as to enable him to amass a huge fortune with a. 
rapidity hitherto unknown. 

The causes of this change are chiefly two ; firstly, the 

general growth of wealth ; and secondly, the 

as a result of development of new facilities for communication, 
t'wo causes ^ ' 

by which men, who have once attained a com- 
manding position, are enabled to apply their constructive or 
speculative genius to undertakings vaster, and extending over 
a wider area, than ever before. 

It is the first cause, almost alone, that enables some bar- 
risters to command very high fees ; for a rich 
client whose reputation, or fortune, or both, are 
at stake will scarcely count any price too high to 
secure the services of the best man he can get : 
and it is this again that enables jockeys and painters and 
musicians of exceptional ability to get very high prices. In 
all these occupations the highest incomes earned in our own 

of w^hich one 
acts almost a- 
lone on profes- 
sional in- 


generation are the highest that the world has yet seen. But 
so long as the number of persons who can be reached by a 
human voice is strictly limited, it is not very likely that any 
.singer w ill make an advance on the £10,000, said to have been 
earned in a season by Mrs Billington at the beginning of this 
century, nearly as great as that which the business loaders 
of the present generation have made on those of the last. 

For the two causes have co-operated to i)ut enormous 
power and wealth in the hands of those business ^^.^^ ^^^^ ^^^ 
men of our own generation who have had first- fuHy with re- 
rate genius, and have been favoured by fortune. K^^^ i^°omei' 
This is most conspicuous in America, where 
several men who began life poor, have amassed more than 
£10,000,000 each. It is true that a great part of these gains 
have come, in some cases, from the wrecks of the rival 
speculators who had been worsted in the race. But in others, 
as for instance, that of the late Mr Vanderbilt, they were 
earned mainly by the supreme economizing force of a great 
constructive genius working at a new and large problem with 
a free hand : and Mr Vanderbilt probably saved to the people 
of the United States more than he accumulated himself. 

§ 9. But these fortunes are exceptional. The diffusion 
of knowledge, the improvement of education, the progress is fast 
t'rowth of prudent habits among the masses of improving the 

» ^ . • v- i_ 0.1. condition of 

the people, and the opportunities which the new ^^g great body 
methods of business offer for the safe investment ll^f^l^°'^'''^ 
of small capitals : — all these forces are telling on 
the side of the poorer classes as a whole relatively to the 
richer. The returns of the income tax and the house tax, the 
statistics of consumption of commodities, the records of 
salaries paid to the higher and the lower ranks of sers^ants 
of Government and public companies, tend in the same 
direction, and indicate that middle class incomes are in- 
creasing faster than those of the rich ; that the earnings of 
artisans are increasing faster than those of the professional 


BOOK VI. CH. XII. § 9. 

classes, and that the wages of healthy and vigorous unskilled 
labourers are increasing faster even than those of the average 

It must be admitted that a rise in wages would lose part 
The incon- of its benefit, if it were accompanied by an in- 
ploymentin"" ^^^^«^ ^^ ^^^ ^^^ Spent in enforced idleness. 
dli°s1""is'"a t ^^^^'^^^^^^y of employment is a great evil, and 
to be exagge- ''iglitly attracts public attention. But several 
^ated. causes combine to make it appear to be greater 

than it really is. 

When a large factory goes on half time, rumour bruits 
the news over the whole neighbourhood, and perhaps the 
newspapers spread it all over the country. But few i)eople 
know when an independent workman, or even a small em- 
ployer, gets only a few days' work in a month; and in conse- 
quence whatever suspensions of industry there are in modern 
times, are apt to seem more important than they are relatively 
to those of earlier times. In earlier times some labourers 
were hired by the year : but they were not free, and were 
kept to their work by personal chastisement. There is no 
good cause for thinking that the mediaeval artisan had con- 
stant employment. And the most persistently inconstant 
employment now to be found in Europe is in those non- 
agricultural industries of the West which are most nearly 
mediaeval in their methods, and in those industries of Eastern 
and Southern Europe in which medieval traditions are 

In many directions there is a steady increase in the pro- 
portion of employes who are practically hired by the year. 

1 A great body of statistics relating to nearly all civiUze<l countries, and 
nnifomly tending m this direction is contained in M. Leroy Beaulieu's ksai 
Z^V'^^'TJT t' ^'^*^"'^^' «^ ''<''■ ^« tendance a nm moindre intgalite des 

1^1 "7,^^' ^' ?^''^'"'' ^^'^'"'^ *« '^^ »«y^' Statistical Society S 
18« on I he increase of moderate incomes points the same way; and above all 
so do the very careful and instinctive studies of wage statistics made by 
Mr Giffen in his private and in his official capacity ^ 



This is for instance the general rule in many of those trades 
connected with Transport which are growing fastest, and are 
the representative industries of the second half of the nine- 
teenth century, as the manufacturing trades were of the first 
half. And though the rapidity of invention, the fickleness 
of fashion, and above all the instability of Credit, do certainly 
introduce disturbing elements into modern industry ; yet, as 
we shall see presently, other influences are working strongly 
in the opposite direction, and there seems to be no good 
reason for thinking that inconstancy of employment is in- 
creasing on the whole. 

Progress then has done much : but there still remains a 
great, and — in consequence of improved sanita- 
tion—perhaps a growing Residuum of persons Sole"who^are 
who are physically, mentally or morally incapable ""*^* ^°^ ^^'^^ 
of doing a good day's work with which to earn 
a good day's wage ; and some of those who are called artisans, 
together with many unskilled labourers, work hard for over 
long hours, and provide for others the means of refinement 
and luxury, but obtain neither for themselves nor their 
children the means of living a life that is worthy of man. 

There is a strong temptation to over-state the economic 
evils of our own age, and to ignore the existence 

/•••I 1 •!• T i> 1 The tempta- 

or similar and worse evils in earlier ages ; for by tion to under- 
so doing we may for the time stimulate others, as state the bene- 

*^ ' fits of progress. 

well as ourselves, to a more intense resolve that 
the present evils shall no longer be allowed to exist. But it 
is not less wrong, and generally it is much more foolish, to 
palter with truth for a good than for a selfish cause. And 
the pessimist descriptions of our own age, combined with 
romantic exaggerations of the happiness of past ages, must 
tend to the setting aside of methods of progress, the work of 
which if slow is yet solid ; and to the hasty adoption of others 
of greater promise, but which resemble the potent medicines 
of a charlatan, and while quickly effecting a little good, sow 


BOOK VI. CH. XII. 5§ 9, 10. 

the seeds of widesprefid and lasting decay. This impatient 
insincerity is an evil only less great than that moral torpor 
which can endure that we, with our motlern resources and 
knowledge, should look on contentedly at the continued 
destruction of all that is worth having in multitudes of 
human lives, and solace ourselves with the reflection that 
anyhow the evils of our own age are less than those of the 


§ 10. We have not yet reached the stage at which we can 
-,.... profitably examine the general effects of economic 

The broader t' J o -r» • mi i 

influences of progress on human well being. But it will be 
progress. ^^^^ before ending this Book, to pursue a little 

further the line of thought on which we started in Book in., 
when considering Wants in relation to Activities. We there 
saw reasons for thinking that the true key-note of economic 
progress is the development of new activities rather than of 
new wants ; and we may now make some study of a question 
that is of special urgency in our own genei-ation ; viz. — what 
is the connection between changes in the manner of living and 
the rate of earnings ; how far is either to be regarded as the 
cause of the other, and how far as the effect. 

Let us take the term the Standard of Life to mean the 
Standard of Activities and of Wants. Thus a 

Standard ^^^ jj^ ^^iQ Standard of Living implies an increase 

of Life. ^ '■ 

of intelligence, and energy and self-respect ; 
leading to more care and judgment in expenditure, and to an 
avoidance of food and drink that gratify the appetite but 
afford no strength, and of ways of living that are unwhole- 
some physically and morally. A rise in the Standard of Life 
for the whole population will much increase the National 
Dividend, and the share of it which accrues to each grade and 
to each trade ; and a rise in the Standaixl of Life for any one 
trade or grade will raise their efficiency and their own real 
waires : while it will at the same time enable others to obtain 
their assistance at a cost somewhat less in proportion to its 



efficiency; and of course it will increase the National Dividend 

a little. 

But many writers have spoken of the influence exerted 

on wages by a rise not in the Standard of Life, ^ ^ise in the 

but in that of Comfort ; — a term that may suggest Standard of 

, Comfort {"aises 

a mere increase of artificial wants, among which wages chiefly 

perhaps the grosser wants may predominate. It d^rec?^nflu~°' 
is true that every broad improvement in the ence in rais- 
Standard of Comfort is sure to bring with it a dard of Activi- 
better manner of living, and to open the way to ****• 
new and higher activities ; while those who have hitherto had 
neither the necessaries nor the decencies of life can hardly fail 
to get some increase of vitality and energy from an increase 
of comfort, however gross and material the view which they 
may take of it. Thus a rise in the Standard of Comfort 
does to some extent involve a rise in the Standard of Life; 
and in so far as this is the case it does tend to increase the 
National Dividend and to improve the condition of the people. 
Some writers however of our own and of earlier times 
have gone further than this, and have implied 

^ , -^ . Limitations of 

that a mere increase of wants tends to raise the influence 


But the only direct effect of an increase \^^^ ^ ^ rj^e 
of wants is to make people more miserable than in the Stan- 
before. And if we put aside its probable in- causing a di- 
direct effect in increasing activities, and other- "}*"*^*?^J ^"P" 

o ' _ _ ply of labour. 

wise raising the Standard of Life, it can raise 

wages only by another indirect effect, viz. by diminishing the 

supply of labour. 

The doctrine that, merely through its action in diminish- 
ing the supply of labour, a rise in the Standard of Comfort 
raises wages, and is one of the most effective means for that 
purpose, has been consistently held by those who believe that 
population is pressing on the means of subsistence so hardly, 
that the rate of growth of population exercises a predomi- 
nating influence on the rate of wages. For if that be true, 


BOOK VI. CH. XII. SS 10, 11. 

then it is also true that at least one of the most efficient means 
of raising wages is to induce people to adopt a higher Standard 
of Comfort, in however mean and soi-did a sense the term 
Comfort is used : since in order to indulge the new desires 
rising out of their extended desire for comfort they may 
probably marry late, or otherwise limit the number of their 

But this cannot be maintained by those who hold, as most 
writers of the present generation do, that the new facilities 
of transport have much lessened for the present the in- 
fluence which the Law of Diminisliing Return exercises on 
production; and that the countervailing influences of the 
Law of Increasing Return are so strong that an increase of 
numbers does not at present tend greatly to reduce the 
average income of the people. 

It is indeed still possible to contend that a mere diminu- 
tion in the supply of manual labourers as a whole, or of any 
one class of them in particular, will increase the competition 
for their aid on the part of the higher grades of labour, and 
the owners of material capital ; and that in consequence their 
wages will rise. This argument is no doubt valid so far as it 
goes : but the rise of wages that can be got by any class of 
labour simply by making itself scarce, and independently of 
any improvement in its Standard of Activities, is generally not 
very great, except in the case of the lowest grades. We will 
consider this problem in some detail with reference to that 
particular change in the Standard of Living which takes the 
form of shortening the hours of labour, and of wise uses of 

§ 11. The earnings of a human being are commonly 
The wasteful, counted gro88 ; no special reckoning being made 
ness of exces- for his wear-and-tear, of which indeed he is him- 
self often rather careless; and, on the whole, 
but little account is taken of the evil effects of the overwork 
of men on the well-being of the next generation, althouf'h 



the hours of labour of children are regulated by law in their 
own interests and those of women in the interests of their 

When the hours and the general conditions of labour are 
such as to cause great wear-and-tear of body or mind or both, 
and to lead to a low standard of living ; when there has been 
a want of that leisure, rest and repose, which is one of the 
necessaries for efficiency; then the labour has been extrava- 
gant from the point of view of society at large, just as it 
would be extravagant on the part of the individual capitalist 
to keep his horses or slaves overworked or underfed. In such 
a case a moderate diminution of the hours of labour would 
diminish the National Dividend only temporarily; for as 
soon as the improved Standard of Life had had time to have 
its full effect on the efficiency of the workers, their increased 
energy, intelligence and force of character would enable them 
to do as much as before in less time ; and thus, even from the 
point of view of material production, there would be no more 
ultimate loss than is involved by sending a sick worker into 
hospital to get his strength renovated. And, since material 
wealth exists for the sake of man, and not man for the sake 
of material wealth, the fact that inefficient and stunted human 
lives had been replaced by more efficient and fuller lives 
would be a gain of a higher order than any temporary 
material loss that might have been occasioned on the way. 
This argument assumes that the new rest and leisure raises 
the Standard of Life. And such a result is almost certain to 
follow in the extreme cases of overwork which we have been 
now considering ; for in them a mere lessening of tension is a 
necessary condition for taking the first step upwards. 

This brings us to consider the lowest grade of honest 
workers. Few of them work very hard; but Exceptional 
they have little stamina : and many of them are conditions of 

•^ . . the lowest 

SO overstrained that they might probably, after a grade of work- 
time, do as much in a shorter day as they now do 




( ; 


BOOK VI. CH. XII. (§ 11—13. 

ill a long one. Moreover they are the one class of workei-s, 
whose wages might be raised considei-ably at the expense of 
other classes by a mere diminution in the supply of their 
labour. Some of them indeed are in occupations that are 
closely pressed by the competition of skilled workers using 
machinery; and their wages are controlled by the Law of 
Substitution. But many of them do work for which no 
substitute can be found ; they might raise the price of their 
labour considerably by stinting its supply ; and they might 
have been able to raise it a very great deal in this way, were 
not any rise sure to bring into their occupation other workers 
of their own grade from occupations in which wages are 
controlled by the Lfiw of Substitution'. 

§ 12. Again there are some branches of industry which 
In some trades at present tum to account expensive plant durinf 
combined whh ^^^7 ^^^ ^ours a day ; and in which the gradual 
wouw* be 'an ^^^^^^^^^^i^n of two shifts of eight hours would 
almost unmix- be an unmixcd gain. The change would need to 
ed gain. ^^ introduced gradually ; for there is not enough 

skilled labour in existence to allow such a plan to be adopted 
at once in all the workshops and factories for which it is 
suited. But some kinds of machinery, when worn out or 
antiquated, might be replaced on a smaller scale; and, on 
the other hand, much new machinery that cannot be profit- 
ably introduced for a ten hours' day, would be introduced for 
a sixteen hours' day ; and when once introduced it would be 
improved on. Thus the arts of production would progress 
more rapidly ; the National Dividend would increase ; work- 
ing men would be able to earn higher wages without tempting 
capital to migrate to countries where wages were lower, and 
all classes of society would reap benefit from the change. 

The importance of this consideration is more apparent 
eveiy year, since the growing expensiveness of machinery, 

1 See end of Book vi. Cli. in. 



and the quickness with which it is rendered obsolete, are 
constantly increasing the wastefulness of keeping the untiring 
iron and steel resting in idleness during sixteen hours out of 
the twenty-four. In any country, such a change would 
increase the Net produce, and therefore the wages of each 
worker; because much less than before would have to be 
deducted from his total output on account of charges for 
machinery, plant, factory-rent, &c. But the Anglo-Saxon 
artisans, unsurpassed in accuracy of touch, and surpassing all 
in sustained energy, would more than any others increase 
their Net produce, if they would keep their machinery going 
at its full speed for sixteen hours a day, even though they 
themselves worked only eight. 

It must however be remembered that this particular plea 
for a reduction of the hours of labour applies only to those 
ti-ades which use, or can use, expensive plant ; and that in 
some cases, as for instance in some mines and branches of 
railway work, the system of shifts is already applied so as to 
keep the plant almost constantly at work. 

§ 13. There remain therefore many trades in which a 
reduction of the hours of labour would certainly _ ^ . 

•' But in many 

lessen the output in the immediate present, and trades a dimi- 
would not certainly bring about at all quickly Uoure of labour 
any such increase of efficiency as would raise the would lessen 

11 11 11111 production. 

average work done per head up to the old level. 
In such cases the change would diminish the National Divi- 
dend ; and the greater part of the resulting material loss 
would fall on the workers whose hours of labour were dimin- 
ished. It is true that in some trades a scarcity of labour would 
raise its price for a good long while at the expense of the rest 
of the community. But as a rule a rise in the real price of 
labour would cause a diminished demand for the product, 
partly through the increased use of substitutes ; and would 
also cause an inrush of new labour from less favoured trades. 
This leads us to consider the origin of the common belief 


BOOK VI. CH. XII. §^ 13—15. 

the hours of 
labour would 
cause a per- 
manent in- 
crease in the 
demand for 

that a reduction of the hours of labour would raise wages 
generally by merely making labour scarce, and independently 
of any effect it might have in keeping machinery longer at 
work and therefore making it more efficient, or in preventing 
people from being stunted and prematurely worn out by 
excessive work. This opinion is an instance of those mis- 
understandings as to the ways in which a rise in the Standard 
of Comfort can raise wages, to which we referred a little 
while back. 

§ 14. It appears to rest on two fallacies. The first of 
The fallacy these is that the immediate and permanent effects 
that a general Qf ^ change wiU be the same. People see that 

lessening of '^ ^ 

when there are competent men waiting for work 
outside the offices of a tramway company, those 
already at work think more of keeping their posts 
than of striving for a rise of wages : and that if 
these men were away, the employers could not 
resist a demand for higher wages unless they were prepared 
to stop work altogether. They dwell on the fact that if 
tramway men work very short hours, more men must for the 
time be employed, at higher wages per hour and perhaps at 
higlier wages per day. But they overlook the more important 
fact that as a result tramway extensions will be checked, 
there will be less demand for the work of those who make 
tramway plant ; fewer men in the future will find employment 
on the tramways ; many workpeople and others will walk to 
work who might have ridden ; and many will live in closely 
packed cities, who otherwise might have had pleasant gardens 
in the suburbs. If it were true that the aggregate amount of 
wages could be increased by causing every person to work 
one fifth less than now, then it could be increased as much 
by diminishing the population l)y one fifth. Nay more it 
would follow that, had the population at last census been one 
fiftli less than it was, the aggregate wages would have been 
actually higher, and therefore the average wages more than 



a fifth higher than they are now— propositions which go 
beyond the doctrines of the extremest Malthusians. 

Thus their error lies in assuming that there is a fixed Work- 
Pund, a certain amount of work which has to be 
done, whatever the price of labour. On the iTaVx'dWori! 
contrary, the demand for work comes from the ^""'^• 
National Dividend ; that is, it comes from work : the less 
work there is of one kind, the less demand there is for work 
of other kinds ; and if labour were scarce, fewer enterprises 
would be undertaken. Again, the constancy of 
employment depends on the organization of in- /ea^ al' likefy* 
dustry and trade, and on the success with which *° '"crease as 
those who arrange supply are able to forecast inctTsianty of 
coming movements of demand and of price, and ^'"P^oy™^"*- 
to adjust their actions accordingly. But this would not be 
better done with a short day's work than with a lon^^ one • 
and indeed the adoption of a short day, not accompanied by 
double shifts, would discourage the use of that expensive 
plant, the presence of which makes employei^ very unwillinc. 
to close their works ; and it would therefore probably tend'' 
not to lessen, but to increase the inconstancy of employment. ' 
§ 15. The second fallacy is allied to the first. It is that 
all trades will gain by the general adoption of a 
mode of action which has been proved to enable Jrguilfg ^'fhat 
one trade, under certain conditions, to crain at ^" *^^^^« ^an 
the expense of others. It is undoubtedly true fn^" their'u-" 
that, if they could exclude external competition, ''°"'"^"'-". 
plasterers or shoemakers would have a fair chance of raisincr 
their wages by a mere diminution of the amount of work done 
by each. But these gains can be got only at the cost of a 
greater aggregate loss to other sharers in the National Divi- 
dend '. 

It is a fact— and, so far as it goes, an important fact— that 
some of these shares will not belong to the working classes ; 
1 See Book v. Ch. vi. § 2, and Book vi. Ch. ii. § 6. 
^' 23 

354 BOOK VT. CH. XIT. § 15. 

part of the loss will certainly fall on employers and capitalists 
whose Personal and Material capital is sunk in building or 
shoemaking, and part on the well-to-do users or consumers 
of houses or shoes. But a part of the loss will fall on the 
working classes as users or consumers of houses or shoes ; and 
part of ''the loss resulting from the plasterers' gain will fall on 
bricklayers, carpenters, etc., and a little of it on brickmakers, 
seamen employed in importing wood for building, and others. 

If then all workers reduce their output there will be a 
great loss of National Dividend ; capitalists and employers 
may indeed bear a large share of the burden ; but they are 
sure not to bear all. For— to say nothing of the chance that 
they may emigrate and take or send their free capital for in- 
vestment abroad— a great and general diminution of Earnings 
of Management and of interest on capital, would lead on the 
one hand to some substitution of the higher grades of labour 
for the lower throughout the whole continuous descending 
scale of employment', and perhaps to some 
g'nera"/outpu[ falling-off in the energy and assiduity of the 
lowers wages leading minds of industry; while, on the other 

generally. ^^^^^ °^ ^^^^^ ^^^^^ ^^^ ^^^.^^ ^j capital^ And 

in so far as it had this last result it would diminish that 
abundance of capital relatively to labour which alone would 
enable labour to throw on capital a part of its share of the 
loss of the National Dividend =*. 

1 See Book vi. Ch. vii. §§ 2- 

2 See Book iv. Cli. vii § 6, and Book vi. Cli. vi. § 1. 

3 To take an Ulustration, let us suppose that shoemakers and hatters are 
in the same grade, working equal hours, and receiving equal wages, before and 
after a general reduction in the hours of labour. Then both before and after 
the change, the hatter could buy, with a month's wages, as many shoes as 
were the Net product of the shoemaker's work for a month (see Book vi. 
Ch I ^ 6) K the shoemaker worked less hours than before, and in con- 
sequence did less work, the Net product of his labour for a month would have 
diminished, unless either by a system of working double shifts the employer 
and his capital had earned profits on two sets of workers, or his profits could 
be cut down by the full amount of the diminution m output. The last 
supposition is inconsistent with what we know of the causes which govern the 


But we must be careful not to confuse the two questions 
whether a cause tends to produce a certain effect 
and whether that cause is sure to be followed by against" crude 
that effect. Opening the sluice of a reservoir arguments 
tends to lower the level of the water in it ; but fXcy po^<'^^ 
if meanwhile larger supplies of water are flowing ^^'^ ^^^ ^^^P' 
in at the other end, the opening of the sluice may ^ 
be followed by a rising of the level of the water in the cistern. 
And so although a shortening of the hours of labour would 
tend to diminish output in those trades which are not already 
overworked, and in which there is no room for double shifts ; 
yet it might very likely be accompanied by an increase of 
production arising from the general progress of wealth and 

supply of capital and business power. And therefore the hatter's wages 
would go ess far than before m buying shoes ; and so all round for other trades 
A smaU part of the loss might be thro^vn on rent : but it is not necessary 
to allow for much under this head. Also our argument assumed, what would 
be sure to be approximately true, that, taken one with another, the values 
relatively to shoes of the things that the employer had to buy remain un- 

1 We must distrust all attempts to solve the question, whether a reduction 
of the hours of labour reduces production and wages, by a simple appeal to 
facts. For whether we watch the statistics of wages and production im- 
mediately after the change or for a long period following it, the facts which we 
observe aie hkely to be due chiefly to causes other than that which we are 
wishmg to study. Firstly, the effects which immediately foUow are likely to 
be misleading for many reasons. If the reduction was made as a result of a 
successful strike, the chances are that the occasion chosen for the strike was 
one when the strategical position of the workmen was good, and when the 
general conditions of trade would have enabled them to obtain a rise of wages 
If there had been no change in the hours of labour: and therefore the im- 
mediate effects of the change on wages are likely to appear more favourable 
than they really were. And again many employers, having entered into 
contracts winch they are bound to fulfil, may for the time offer higher wages 
for a short day than before for a long day : but this is a result of the sudden- 
ness of the change, and is a mere flash m the pan. On the other hand if men 
have been overworked, the shortening of the hours of labour will not at once 
make them strong: the physical and moral improvement of the condition of 
the workers, with its consequent increase of efficiency and therefore of waces 
cannot show itself at once. ^ ' 

And secondly, the statistics of production and wages several years after the 



BOOK VI. CH. XII. 5 16. 

§ 16. All this tends to show that a general reduction of 

the hours of labour is likely to cause a little net 

elusion as° to material loss and much moral good : that it is 

the hours of ^ot adapted for treatment by a rigid cast-iron 

system, and that the conditions of each class of 

trades must be studied separately. 

Perhaps £100,000,000 annually are spent even by the 
working classes, and £400,000,000 by the rest of 
good"*but*oniy *^^® population of England in ways that do little 
if it is well- qj, nothing towards making life nobler or truly 
happier. And it would certainly be well that 
all should work less, if we could secure that the new leisure 
be spent well, and the consequent loss of material income be 
met exclusively by the abandonment by all classes of the 
least worthy methods of consumption. But this result is not 
easy to be attained: for human nature changes slowly, and in 
nothing more slowly than in the hard task of learning to use 
leisure well. In every age, in every nation, and in every rank 
of society, those who have known how to work well have 
been far more numerous than those who have known how to 
use leisure well; but on the other hand it is only through 
freedom to use leisure as they will that people can learn to use 
leisure well: and it is true that no class of workers who are 
devoid of leisure can have much self-respect and become full 
citizens: some time free from fatigue and free from work are 
necessary conditions of a high Standard of Life. 

A person can seldom exei-t himself to the utmost for more 

reduction of hours are likely to reflect changes in the prosperity of the country, 
or of the trade in question, or of the methods of production, or lastly of the 
purchasing power of money : and it may be as difficult to isolate the effects of 
reduction of the hours of labour as it is to isolate the effects on the waves of a 
noisy sea caused by throwing a stone among them. 

It must be remembered that a reduction of the hours of labour has often 
been a form and a good form, in which the workers have chosen to take out a 
part of that rise in real wages which the economic changes of the time put at 
their command. 


than eight hours a day with advantage to any one; but he 
may do light work for longer, and he may be ^^ 

tt T , )) 1 , , Those who are 

on duty, ready to act when called on, for notover-work- 
much longer. And since adults, whose habits are '*** 
already formed, are not likely to adapt themselves quickly to 
long hours of leisure, it would seem more conducive to the 
well-being of the nation as a whole, to take measures for 
increasing the material means of a noble and refined life for 
all classes, and especially the poorest, than to secure a sudden 
and very great diminution in the hours of labour of those who 
are not now weighed down by their work. 

In this, as in all similar cases, it is the young whose 
faculties and activities are of the highest im- Leisure for the 
portance both to the moralist and the economist, youne- 
The most imperative duty of this generation is to provide for 
the young the best education for the work they have to do as 
producers and as men or women, together with long-continued 
freedom from mechanical toil, and abundant leisure for school 
and for such kinds of play as strengthen and develop the 

And, even if we took account only of the injury done to 
the rising generation by living in homes in which 
the father and the mother lead joyless lives, it tle%'i"si""* °^ 
would be in the interest of society to afford them e«ne'"ation in 

^' £ ATT I 1 the hours of la- 

some reiiet. Able workers and good citizens are bour of their 

not likely to come from homes from which the p'"'"*'"*^- 
mother is absent during the great part of the day, nor from 
homes to which the father seldom returns till his children are 
asleep. And therefore not only the individuals immediately 
concerned, but society as a whole, has a direct interest in the 
curtailment of extravagantly long hours of duty away from 
home even for mineral-train-guards and others, whose work 
is not in itself very hard. 



§ 1. Ix considering the recent progress of the working 
Trade Unions ^^^^ses, but little hiis yet been said of the growth 
in relation to of Trade-unions : but the two movements have 

progress. • i i 

certamly kept pace with one another; and there 
is a primd facie probability that they are connected, each 
being at once partly a cause and partly a consequence of the 
other. We may now proceed to inquire into the matter more 

We have already noticed Uiow the first endeavours of the 
Early action of ^^^^ workmen's associations or Unions at the 
Unions. beginning of this century were directed to 

securing the enforcement of mediaeval labour laws. But 
these, no less than the ordinances of the old gilds, were un- 
suited to the modern age of mechanical invention, and of 
production on a large scale for markets beyond the seas ; and 
early in this century the Unions set themselves to win the 
right of managing their own affairs, free from the tyranny of 
the Combination Laws. 

These laws had made a crime of what was no crime, the 
Repeal of the ^g^'^^ment to refuse to work in order to obtain 
Combination higher wages ; and "men who know that they 


are criminals by the mere object which they 
have in view, care little for the additional criminality involved 
in the means they adopt." They knew that the law was full 

1 Book I. Ch. II. § 5. 



of class injustice: destruction of life and property, when it 
was wrought for the purpose of enforcing what they thought 
justice, seemed to them to have a higher sanction than that 
of the law; and their moral sense became in a measure 
reconciled to crimes of brutal violence. But step by step the 
Combination Laws have been repealed: until now nothing is 
illegal if done by a workman, which would not be illegal if 
done by anyone else; nothing is illegal when done by a 
combination of workmen, which would not be illegal when 
done by a combination of other people ; and the law no longer 
refuses to protect the property of the Unions. 

With freedom came responsibility. Violence and the 
intimidation of Non-Unionists, which had lost all excuse, soon 
went out of favour; and workmen generally chose for- their 
leaders able and far-seeing men, and under their guidance the 
modem organization of Unions has been rapidly developed^ 

A modern Union is generally an Association of workers 
in the same or allied trades, which collects funds 
from all its members and applies them firstly to ti^°sof 
support those of its members who cannot obtain ""*°"*- 
employment except on tenns which it is contrary to the 
general trade policy of the Union for them to accept, and 
secondly to grant certain Provident Benefits to members 
in need. The policy of the Unions varies in detail with 
time and circumstances; but its chief aims are generally the 
increase of wages, the reduction of the hours of labour, the 
securing healthy, safe and pleasant conditions of work,' and 
the defending individual workers from arbitrary and unjust 
treatment by their employers. Most of their regulations are 
framed either for the direct attainment of some of these aims; 
or for securing conditions of hiring which will enable the 
employed to deal as a body with their employers, conditions 

1 The various stages through which the chief aims and the plan of 
organization of the Unions liave passed are explained in 77te History of 
Trade Unionism by Sidney and Beatrice Webb. 



which they regard as generally needed for the attainment of 
all their aims. 

§ 2. A large Union is often an amalgamation of numerous 
Local respon- ^"^^"^^ associations, Originally local or confined 
sibiiity and to a Subdivision of the trade. But whatever its 
authority. ^"^^' ^^^^^y every important Union has many 

branches, each of which, while managing its own 
affairs in details, is bound to conform to the general rules of 
the whole body. These rules are very explicit; and in 
particular they prescribe rigidly the ways in which ea^h 
branch may spend the funds in its charge : for the power of 
the purse is retained strictly in the hands of the central 
body. The branch dispenses Provident Benefits according to 
rule ; but except on emergency and for a short time it may 
not spend the corporate funds on a trade dispute, without the 
sanction of the central council or Executive representing the 
whole body, who are generally selected from the branch- 
officials that have deserved best of their Society. 

The character and ability of the branch-officials are tested 
in action as well as in speech. For they have important business 
to manage, and those who neglect their duties, who prove 
themselves lax financiers, or give advice that is not justified 
by the event, are not promoted, however eloquent they may 
be ; and consequently the Executive of the best Unions are 
shrewd, far-seeing men, resolute but with great self-control. 

It is these men whose sanction has to be obtained by any 
Precautions branch that wishes to use the corporate funds in 

dfsputes""""' '' . ^'''''^^ ^^"P"^^- ^^^y ««^e to the question 
with tempers unruffled by any personal vexations. 
Their vanity is not enlisted in the continuance of the struggle; 
they can decide without loss of prestige that it is inopportune' 
or even wrong in principle ; and they have nothing to gain,' 
but mucli to lose, by becoming responsible for an expensive 
strike that ultimately fails. The decisions of the Executive 
are generally binding till the next annual general meetin- 



of the representative delegates of the whole body • but in 
certain emergencies a special meeting of the delegates is 
called, or a plebiscite of the whole body is taken by votin^r 
papers. " 

The administration of the funds with regard to Provident 
Jienelits is more a matter of routine, and is 
governed strictly by rule. These Benefits vary. B^emr 
The "New" Unions that have sprung up in recent times, 
chiefly in unskUled trades, generally regard Provident Funds 
as an encumbrance, hindering freedom in fight, and tendin.^ 
to an over-cautious and unenterprising policy in U-Je 
matters. And the list of Benefits afforfed by many even 
ot the older Unions is a meagre one. But the best Unions 
pride themselves on rendering their members independent 
of all charitable aid, public or private, during any of 
the more common misfortunes of life. They proWde Sick 
Accident, Superannuation and Funeral Benefits ; and above 
all they give out-of-work pay for a long (though of course not 
unlimited) time to any member, who needs it through no fault 
of his own-a Benefit which none but a trade Society could 
undertake. For only the membe.^ of his own trade can judge 
whether his want of work is due to his idleness or other fault 
and whether he is putting too high an estimate on the value 
of his work : and they alone have an interest in supporting him 
in the refusal to sell his work for less than they think it is 
really worth. And at the same time the expense of managing 
the whole business of the Union is less than would be that of 
managing its Provident alone by any other Society 
for the local officers get good information without trouble 
they spend nothing on a^lvertising, and they receive but 
trifling salaries'. 

depressiou. But the burden of Snperaunuatiou Benefit increases steadUy wUh 




§ 3. Such being the general plan of Trade-unions, we 
may pass to examine the influence which they can exert on 


An artificial 
scarcity of la- 
bour in a trade 
can raise 
wages much 
if four con- 
ditions are 

We have already incidentally inquired whether wages can 
be raised pennanently by diminishing the supply 
of labour; and we may begin by recapitulating 
the results obtained. If the workers in any 
trade are able to limit artificially the supply of 
their labour, they can certainly secure a con- 
siderable increase of wages, which will be the 
greater, the more fully four conditions are satisfied ^ They 
are: Firstly, that there is no easy alternative method of 
obtaining the commodity which their trade helps to produce ; 
and this generally requires («) that they have control over 
the supply of labour in their trade and district; (h) that the 
commodity cannot easily be brought from some other district, 
in which the conditions of labour are beyond their control; 
and (c) that there is no available mechanical or other contri- 
vance by which the commodity can be produced independently 
of them : Secondly, that the commodity is one the price of 
which will be raised considerably by a stinting of supply, or 
in other words the demand for it is not very elastic : Thirdly, 
that the share of the total expenses of production of the 
commodity which consists of their wages is small, so that a 
great proportionate rise in them will not greatly raise its 

the lapse of years; for the average age of the Unionists has uot yet reached 
Its inaxununi. Less than a tenth of the total expenditure comes under the 
head of strike pay in an average year's budget of the first class Unions. But 
many of the differences between individual workpeople and then- employers, 
which result m their ceasing to be employed, are of the nature of trade 
"disputes," though not technically so called. And some Unions do not even 
attempt to make any distinction in their accounts between "out-of-work" 
pay and strike pay: though the former, when given at all, is at a lower rate 
than the latter. It seems however that not more than a fifth of the total 
expenditure can be ascribefl to "disputes" in the broadest use of the term. 

The accumulated Funds of the cliief Old Unions average about two weeks' 
wages of their members. • 

1 Comp. Book V. Ch. vi. § 2. 



price and diminish the demand for it. And, Fourthly, that 
the other classes of workers, and tlie employers, in the trade 
are squeezable, or at least are not in a position to secure for 
themselves an increased shq,re of the price of the joint product 
by limiting artificially the supply of their labour and capital. 

The effect on the wages paid for doing a given piece of 
work would be just the same whether the num- 
ber of workei-s in a trade were diminished by a ^^^^''e"* 
tenth, or the amount of work done by each were Smiting the 
diminished by a tenth (other things being equal) ' : woS'ers°and 
but on the latter plan the same aggregate wa^^es *^^ ^°^^ *^°"^ 
would be divided among more people, and the ^^^^''^' 
rate of w^ages per head would be a tenth lower. 

If the amount of work done per head is diminished by 
lessening the hours or the severity of work, there is some 
compensating gain in increased leisure, or freedom from strain : 
but if it is diminished by insisting on uneconomical methods 
of work, there is no such compensation. 

When the Net Advantages of a trade are abnormally high 
relatively to others in the same grade, there will 
be a strong drift into the trade, both of adult wi^es"iersus 
workers and of children, by routes direct and other NeT"^ 
indirect ; and this drift can be resisted only by ^^^^"'^^"• 
hard and harsh measures which interfere much with the free 
course of business. Human nature being what it is, the drift 
from outside will be stronger into a trade with very high money 
wages than into one with rather high wages, and considerable 
other Net advantages. And partly for this reason the Unions 
of the skilled trades are aiming rather at the latter than the 
former end. 

1 Other things would indeed not be equal: for the larger number of men 
would want more supeiintendence, more space, and more machinery (uXss 
they workecl double shifts instead of single); and therefore their aggregate 
wages would be less, and their wages per head nxore than a tenth lesfthaT if 
the supply of labour were lessened by a mere duninution of numbers 





BOOK VI. CH. XIII. g 3, 4 

The recent extension of Trade-unionism to unskilled 
Permanent labour has been confronted by the fact that an 

limitations of .•/••, ... . 

the work done 

in all trades 

must lower 



artificial restriction of the numbers in any un 
skilled trade is difficult, and in all trades to- 
gether impossible, unless multitudes are to be 
supported in idleness. But it is not impossible 
to make labour scarce in all trades by shortening the hours of 
labour sufficiently. The movement in this direction, is, as we 
saw in the last chapter, the composite product of a genuine 
desire for more leisure for its own sake, and of a fallacious 
belief that there is a fixed Work-Fund. We concluded that, 
if there is a general diminution in the amount of work done,' 
the National Dividend will shrink and the share of it that 
goes to the working classes, or in other words the aggregate 
of weekly (real) wages will shrink also, though not^perhaps 
quite in the same proportion. And since there would be no 
diminution in the number among whom this aggregate was 
divided, average (real) wages would fall very nearly in pro- 
portion to the diminution of the work done. 

§ 4. Leaving then this recapitulation of the results of 
We pass to at- P^nnanently lessening the supply of labour, we 

cure^hi h°er^^' ^^^^ ^^^^ ^^ *^® °^^"^ ^^^ ^^ *^^^^ Chapter. That 
wages for la- ^s to inquire whether, by a judicious use of the 

eX'to with': ^^"^^* ^^ temporarily withholding the supply of 
hold its supply labour, Unions can force employers, and through 

temporarily. xi. j.i . , ^ 

them the community at large, to pay higher 
wages temporarily. It is clear that this question is\ot 
decided by the argument of the last Section. For if two 
men are rowing in the same boat and one pulls all the time 
with only half his strength, his progress will be slow : but if 
he thinks the other is doing less than a fair share of work, 
he may possibly find it a good policy to refuse to row till the 
other exerts himself more; he may conceivably reach his 
journey's end quicker than if he rowed on steadily without 
demur. Here then is the true centre of this contest as to the 
efficacy of Unions to raise wages. 



We may start from the indisputable fact that the wage of 
labour of any kind tends, like the value of a 
material commodity, to a position of equilibrium forces°of"sup- 
at which the amount which will be normally mand"do**n'ot 
demanded is equal to that which will be nor- always act 
mally supplied. But this tendency does not Zl%7f 
always operate freely : it may even be suspended ^^^o"'*- 
for the time, if either the buyers or the sellers have no reserve 

A working man who is not a member of a Trade-union can 
seldom stand out long for a reserved price for his labour; and 
thus he may fail to get much benefit from the fact that, other 
things being equal, it will be to the interest of employers to 
pay wages equal to the net value of his work, if they cannot 
get a sufficient supply of labour on cheaper terms. 

Take for instance the case of a farmer who calculates that 
the work of an additional labourer would add 
to the produce of his farm enough to repay with c^ombinltiLn"' 
profits the outlay of lis. a week in wages. Ko °^ ^"^P^oy^'"^- 
doubt it will then be to his interest, other things being equal, 
to offer these wages rather than go without the extra assist- 
ance. But other things are veiy likely not to be equal. If 
the current rate in the parish is 12^. a week, he could not bid 
Us. without incurring odium among his brother farmers, and 
perhaps tempting the labourers already in his employ to 
demand Us. So he will probably offer only 12^., and com- 
plain of the scarcity of labour. The price of Us. will be main- 
tained because competition is not perfectly free ; because the 
labourers have not much choice as to the market in which 
they sell their labour; and because they cannot hold back 
their labour at a reserve price equal to the highest wage which 
the employer can afford to pay*. 

1 The general theory bearing on this point is indicated in Book V Ch ii 
and IS worked out more fully in the corresponding chapter of the PnncipUs '' 
The disadvantage under which labourers lie in such a case as this may 


BOOK YI. CH. xiri. §§ 4, 5. 


And even where employers are not iu any combination 
A single large ^'^'\ "^ '''"''^'"^' *» ^gulate Wages, each large 

employer is a employer IS m his own person a perfectly firm 
combination in «„„l,;„„i: c , . t"^'ic>-i.ij( jiim 

himself. combination of employing power. A combination 

of a thousand workers has a very weak and un- 
certain force in comparison with that of a single resolute 
employer of a thousand men: and though such an employer 
sees his profits m hiring a few more men at the current or even 
rather higher wages, he may yet think it the better policy 
not to bid for them lest he should suggest to those already in 
his employment that they should raise their demands. 

be 6«en by considering the position of a shopkeeper in like circnmstances A« 

c vvuu wm pay it. ±Jut if at any tune he were comwllp^l fn o^ii ^*» i,- 
goo<ls qnickly, taking whatever offers he conld get and no toMnfh»I f 

z:Tau''"'"v''%T''; ""^ '" ^'" ""^^ at mufhii'tC^hei ":j 

not stay m the trade. But the labonrer is often wantii^g „ fS mea^s of 
I'H„c:,,le«) "• 8 " »"'* '-^- "■ §§ 1. 2; or the corresponding parts of the 
his ^r^TsU'^""'^'"' *' ^.t""'' '"'''=" '""^<^ M"' considerably to mo.lify 

^a shown that nnder ordinary conditions it is a di^dvanta^e, ^'ITas 


are at a d.sad™„tage who are known to be bound to seU without rerr^e It 
H.iZ' '!., I 2T "«*'- """ *'•' P"« ''""Id be even more indeCfaate if 
It were settled between two combinations of employers and emX^ th^ f 
e^loyers and employed bargain freely with one another: but i^^tte fomer 

^in Uiettt''' "" ""' " """ ''""" *-<'™"'««'' - -gaining'aX 



In such cases as these the special disadvantages of the 
workman in bargaining certainly put his wages 
for a time below the position at which they Unions claim 
would find their level under the free action of de- nomic friction 
mand and supply : and Unionists need not deny workmln^ '^^ 
that those forces are always at work. It is instead of 
enough for their argument that, whenever these ^^**"^^ *"*' 
special disadvantages put the current rate of wages below the 
normal rate, the force of economic friction is exerted against 
tlie workman. And they contend that by organization they 
can frequently make that force act in his favour. A viscous 
fluid in a vessel tends to form a level surface : but if from 
time to time an artificial force pushes down the left side, 
which we may take to correspond to wages, it may reasonably 
be maintained that the average position of the left side is 
lower than it would have been without such interference, in 
spite of the indisputable fact that the force of gravitation is 
constantly tending to reinstate the position of equilibrium. 
What Unions claim to be able to do, corresponds to applying 
frequent and stronger pressure on the right-hand side, thus 
causing profits to yield the higher level to wages ; so that the 
average level of wages, partially sustained by friction which 
will now act for them, will be higher instead of lower than 
if the forces of demand and supply acted with perfect freedom. 
§ 5. The chief means at the disposal of Unions for this 
purpose — putting aside for the present the 
modern " boycott,"— are threats of withholding f^^nner 

» X' j.r 1 1 1.1 o in which 

tor a time the labour which employers need in Unions apply 
order to turn to account the investments of wiThhoM the 
capital (material and personal) made in expecta- supply of la- 
tion of getting that labour. They have learnt 
that this threat has but little power when business is 
slack. But when the time has come for the trade to reap 
the har\^est for which it has been waiting, the employers 
will be very unwilling to let it slip; and even if an agree- 

*>' t 


BOOK VI. CH. XIII. §§ 5 — 7. 

merit to resist the demands of tlie men is made, it will 
not easily be maintained, especially if the fruits that they 
might have gathered are being snatched up by rivals outside 
of their combination. Unions further hold that the threat of 
a strike, though less powerful when the tide of prosperity is 
falling than when it is rising, may yet avail for the compara- 
tively easy task of slackening the fall in the high wages they 
have gained. They claim thus to secure an earlier rise, a 
greater rise, and a more prolonged rise than they could get 
without combination. 

The questions at issue are then — Can Unions really make 
economic friction act for the workman instead of against him ? 
Are the means which they take for this purpose injurious 
to production and therefore indirectly to the workman? If 
the answers to both these questions are affirmative, is the 
good on the whole greater or less than the evil ? 

§ 6. Let us then look at the answers to these ques- 
fppon"en"sof ^j^"^^ ^^^.^"^ ^^ ^^'^^^ ^^^ dispute the power of 

Unions. Unions thus to raise wajres. 

objection to 
the assump- 
tion that fric- 
tion is strong 
in the labour 

They take a preliminary objection to the common assump- 
tion of Unionists that cases, such as that of agri- 
cultural labourers quoted above, represent the 
actual condition of any considerable part of 
England's industries. They say that there are 
but few trades in which the employers really act 
in concert, even though they undertake to do so ; 
and that when an employer sees his way to making a profit 
by hiring more labour at the current wages or even a little 
higher, he generally finds means of doing so; and that he 
would almost invariably do so were it not for the influence of 
Trade-unions. For they insist that the very means which 
Unions take to prevent an employer from paying individual 
workers less than a standard rate, make him often hesitate to 
raise the wages of individual men, when he would do so, if 
free from the restrictions and demands of the Union. Thus, 




so far as this count goes, they maintain that competition is 
much more efiective, at all events in the industrial districts of 
modern England, than the arguments of Unionists generally 
imply ; or, to revert to our previous simile, that the action of 
competition corresponds to that of a fluid that is only very 
slightly viscous. And they go on to assert that that slight 
viscosity is partly due to the influence of Unions. 

It is difficult to decide how far this answer is valid. 
On the one hand it is in agriculture, where Unions are weak, 
that we find the most grounds for the complaint that efficient 
and inefficient workers are paid so nearly alike as to give but 
small encouragement to energy. But, on the other hand, 
while this evil is diminishing in agriculture under the influence 
of the growing mobility and independence of the labourer, 
it is increasing in some other industries in which employei-s 
fear that a concession to their best men will be followed by 
further demand of a strong Union on behalf of inferior men. 
This is however a side issue : let us pass to the main issue. 

§ 7. Let us look first at the influence of strikes and 
threats of strikes in a single trade. It is clear 
that, if in any trade the employer is to be R^J°>"derby 

1 , 11 . r J ^ Kjyj opponents of 

narassed at all times, and especially when he Unionsto their 
sees his way to profitable business, then business f^as'i^sClg'ie 
men generally will shun that trade ; unless indeed, ^""^^^ ** ^°"- 
taking one time with another, they are able to 
get from it a rate of profits not merely as high as, but rather 
higher than is to be got in other trades. For the extra worry 
and fatigue of the work to be done will require some com- 
pensation ; and until they get it, the undertakers will seize 
every convenient opportunity of diminishing the stakes which 
they hold in the trade. 

The relative strategic strength of employer and employed 

may determine for the time the shares in which the aggregate 

net income of the trade is divided ; but the terms of the 

division will soon react on the amount of capital* in the trade, 

M. 24 


BOOK VI. CH. XIII. §§ 7, 8. 






and therefore on the amount of that income which is available 
for division '. 

It may be im|x>ssible to force the consumer to pay a price 
that will cover these charges : in that case employment in 
the trade must decline; and then, in spite of the Unions, 
there will be many men running after one employer and wages 
will fall. 

It is true that if the wares produced by the trade have 
even a partial local monopoly and are in strong demand, the 
employes may be able, by well-timed strikes and threats of 
strikes, to obtain a rise of wages at the expense of the consumer, 
and to retain it for a considerable time. But they cannot 
retain long a much higher wage than can be earned in similar 
and neighbouring trades, except by permanently limiting the 
numbers in their trade — a case which we have already 

Next the claim of a Union to obtain a rise of wages by 
striking or threatening a strike, when the employers are 
becoming very busy, is compared by opponents of Unions to 
the claim of those, who have prematurely shaken down unripe 
apples, to have produced the apples. They insist that, as the 
orchard would have yielded better apples and with less 
injury to the trees that have to bear next year's crop, if 
nature had been left to run her course ; so the rise in wages 
that belongs to a peiiod of trade prosperity, though it might 
not have come so soon or have been so sharp, would have 
lasted much longer. The Unions boast of resisting the 
tendency to a subsequent fall : but really that tendency, 
it is argued, is in a great measure of their own creation; 
and it need not have been felt for a long while, if employers 

1 Tliat is, the income is not a Rent proper fixed by external conditions, 
and permanently available for division among the parties iuterestetl : but it is 
a Quasi-rent wlikh will be lessened by every diminution in, the inducements 
to keep up the supplies of capital in the trade. Comp. Appendix D. 

had been able to give their minds to tlieir work untroubled 
by strikes and the rumours of them, and if plans could have 
been made far ahead with confidence that they could be 
carried out, and therefore with but a narrow margin of 
profit. ® 

So far the rejoinder relates to the eflfects of a Union in 
a single trade; and it appears to have much 
force, on the assumption that the net effect of intored'in" 
Trade-union action is to worry and fret the *^^^ ^^Jo»"der. 
undertaker, to make his work more difficult and uncertain, 
and thus to narrow his enterprise. 

§ 8. Leaving this assumption for discussion later on, we 
may follow the course of the argument when 
Trade-unionism is supposed to be extended to o'^pponen'ts o'^f 
all the chief trades of the country. Capital and Unions to their 
business power cannot then take refuge from the t^tagis'/^ ''' 
injuries of Trade-unions by the comparatively ^^""*^' 
easy means of drifting into adjoining trades. 

But it is still true that a rise in wages, if obtained at the 
expense of profits, is likely to diminish the accumulation and 
to promote the emigration of capital; and that it may 
diminish the enterprise of business men, or at least of such of 
them as do not emigrate with their capital. It will thus 
tend both to diminish the National Dividend, which is the 
source of all wages, and to lessen the competition of capital 
for the aid of wages. In both these ways the rise of wages is 
in danger of bringing about its own destruction. 

This old argument has both gained and lost strength in 
recent times. On the one hand migration from one country to 
another is becoming less difiicult both for capital and for the 
employing class ; and, if England should ever cease to be an 
eminently desirable country to live in, a small fall 
in the rate of profits below that obtainable else- i?part'iy'""^'' 
where with equal trouble and worry, would cause weakfrthan ^'^ 
so great a lack of capital and business power, that ^as. 






BOOK VI. CH. XIII. §§ 8, 9. 

the working- classes would be compelled either to provide these 
requisites of production for themselves, or to submit to such 
low wages that they would soon want to emigrate in pursuit 
of the capital and business power. But on the other hand 
every countiy has industrial troubles of its own ; and, so long 
as Englishmen meet theirs in as brave and conciliatory a 
spirit as any other people, the owners of capital and business 
power will have no strong inducement to seek other lands. 

Again, though the dependence of industry on a large 
supply of capital is constantly increasing, yet the influence 
which the fall in the rate of interest exerts in checking 
the accumulation of capital is a little less important than was 
formerly supposed. 

And again thougli progress depends ever more and more 
on the energies of business men, and though some of them 
might slacken their efforts a little if the Earnings of Manage- 
ment were lessened; yet the growth of wealth and intelligence 
are constantly increasing the numbers of those who would do 
the work of business management with great vigour for a 
moderate reward, so long as they could retain their full freedom 
and responsibility, and all the excitements of the chase. 

The rejoinder of the opponents of Unions proceeds :— If it 
But there re- ^® Conceded that the National Dividend would 
mains a power- not be much lessened at once by a general rise of 

ful argument i • i J r> 

in the back- wages obtained at the expense of profits ; and 
ground. ^^^^ labour, getting a larger share of a Dividend 

but little diminished, would be a little better off" for the time ; 
even then it has still to be considered that this diminution 
would be progressive and cumulative^ unless the rise in wages 
exercises some compensatory effect. Thus if in one year the 
diminution of profits causes the stock of capital to be one 
per cent, less than it otherwise would have been, this loss 
will have increased to about two per cent, at the end of 
the second year, to about three per cent, at the end of the 
third year, to about ten per cent, at the end of the tenth 



year, and so on. But this cannot go on for long. For 
while the loss increases steadily year by year, they're will 
be no corresponding increase in the advantage which com- 
bination gives to labourers in their bargaining ; and sooner 
or later the competition of capital for the aid of labour 
in production will be lessened; wages will fall, and will 
probably go on falling until the removal of the causes which 
lessened the supply of capital, and therefore the National 
Dividend \ 

It is then clear that if a rise of wages is obtained simply 
at the expense of profits, if it lowers profits without exerting 
any compensatory effect on the National Dividend, it must 
be self-destructive in the long run. It must lead in time to 
such a scarcity of capital and of business power that the 
National Dividend will be insufficient to afford high wages to 
labour, even while capital is getting a low rate of interest, 
and business power is receiving low Earnings of Management. 

§ 9. Thus the main issue between those who do and those 
who do not think that Unions can permanently 
raise wages, resolves itself almost entirely into the Jl'slwci'ill^f 
narrower question whether the latter are ricrht '"*° *.^* 

• • .-i , *5 question 

in assuming that there is no important compen- whether Union 
sato^r effect to the injuries which some fonns "hoU.°e"set 
ot Irade-union action inflict on production; that Production, 
the net effect of the action of Unions is to hamper business 

a l^a ^,wi^*^^ 7^ ""^ interest from say three to two per cent, would cnt off 
^ ?1 I ?™, l^^. '^''"'^' ^^ "^^"^^ P^«Pl«- S»t those of others would be 
verj' httle affected by it (see Book iv. Ch. vn. § 6), and therefore the percentage 
which tins lowenng of the rate of interest from three to two, too'L from th^ 
stock of capital m successive years would slightly dimhiish. In fact however 
this correction is much less important than one tending in the opposite 
direction. For wages could not be kept at their raised level without th^oSg 
a continually increasing burden on profits; and therefore the diminution (of 
check to the growth) of the National Dividend would be greater hi the 
second year tWn in the first, greater in the third year than in the second 
and so on. Further, a fall in the rate of interest promotes the use of 
mac liinery and tends to increase at the expense of Wage 
capital, and thus slightly to lower wages. ^ 




BOOK VI. CH. XIII. 55 9 — 11. 

and lessen production. Let us then address ourselves to this 
narrower question. 

On the side of Unions it is contended : (i) that the ablest 
Unionists recognize the general solidarity of their interests 
with those of the employer, and so far from needlessly 
hindering him in his business, do all that they can to make it 
work easily, smoothly and certainly by every means that is 
compatible with their retaining their strategic advantages in 
bargaining; and (ii) that their action as a whole tends to 
improve the character and increase the efficiency of labour, 
that this influence is cumulative, and that its benefits out- 
weigh any harm Unions can do in checking the growth of 
the material means of production. Let us investigate these 

§ 10. Firstly as to the evils caused by strikes. Strikes 
Strikes are ^^® often regarded as peculiarly the results of 
generally dis- Trade-unionism. But, as has already been shown, 

couraged by 

the best the better organized a Union is, the smaller is the 

Unions. chance that a local quarrel will mature into a 

strike. And though when a strong Union does strike, the 
contest is likely to be a long one ; yet the unwillingness of 
employers to try conclusions with it, and the prudence of 
the officials of such a Union, together with the form of its 
government, tend to diminish the number of strikes. 

Strikes are of course expensive. But too much attention 
has been paid to the direct expense which they 
expenses of cause to both sides, and perhaps even to the 
smaulm-^ ° occasional privation which they occasion to the 
portance families of the employed. These evils obtrude 

themselves on the notice of every one : and no doubt they are 
great. But they are not great relatively to the immense issues 
at stake. They are not even great relatively to the uncer- 
relativeiy to tamty and friction which strikes bring into busi- 
the policy ncss. It is therefore the general policy of the 

support. Unions, more than the direct expenses of the 



oc«isional strikes by which they enforce that policy, to which 
we must turn our attention'. 

§ 11. We may then pass to that part of Union policy 
which consists of fixing a minimum (local) rate 

£ ii>-i.,i. ^ fixed mini- 

ot wage, and making it so high that it practically mum wage is 
becomes the ordinary rate. Unionists contend rretn"to"the 
that this, while essential to enable them to bar- fa*"* dealing 
gain as a body with the employer, is not an un- ^'"^ °^^*^' 
mixed evil to him. It saves him trouble and anxiety to be 
able to buy his labour, just as it does to buy his raw material, 
at wholesale prices : for then he can be sure that no neigh- 
bouring competitor is buying them at a lower price and thus 
preparing to sell the finished commodity more cheaply than he 
can afford to. What public markets do for the fair-dealing 
employer as regards raw material, Unions do for him, it is 
maintained, as regards labour. 

But unfortunately tliis is not quite true of labour when 
hired by time, because the labour is not sufli- 

. , J ?•> A J •, , *** ^vil arises 

ciently graded-. At present, no doubt, the most chiefly from the 
incompetent people of all are excluded from Jfflr*muc"1n 
Unions by the rule that a candidate for admis- ability and in- 
sion must prove that he is capable of earning the "^*'^* 
local minimum rate of wages^ But to begin with, that is 

1 There is of course no advantage in comparing the expense of any particular 
strike with the total direct gain to wages of any that follow after it: partly 
because the events that follow the strike, may have been due to other causes, 
and pai-tly because a strike is a mere incident in a campaign, and the policy 
of keeping up an army and entering on a campaign has to be judged as a 
whole. The gain of any particular battle is not to be measured by the booty 
got in it; and even defeat is no proof that the General was wrong in not 
submitting without a battle. The cost of strikes is discussed with full 
statistical detail in Mr Burnett's excellent reports on the subject to the Board 
of Trade, and in several Reports of American Labour Bureaux. 

2 Compare Book v. Ch. i. § 3, 

8 Some weight must be allowed to the claim of the Unions that young men 
are stimulated to exertions by knowing that they must work up to this 
standard. But it is not always a very high one ; and, no doubt, some men, 
when they have attained it, exert themselves but little to get beyond it ; l>eiug 
not uuwiUing to draw largely on the out-of-work funds of theii- Union. 


BOOK VI. CH. XIII. SS 11, 12. 




only at the date of liis admission : and for this very reason 
admissions to Unions are most numerous when trade is good, 
and when men rather below the average are for the time 
worth the standard wages. And further men vary as much 
in their willingness, as in their power, to exert themselves to 
do a good day's work for their wages \ 

A conceivable remedy for this could be found by the classi- 
This could be fication of the workers in each trade into several 
unlonsfavou^'r* S^^^^^> ^^^^ ^ minimum (local) rate for each, 
edmoreciassi- Of course learners always have special rates, and 
ca ion ; ^ £^^^ Unions allow old men to work below the 

regular rate. But most Unions are opposed to carrying the 
classification further than this in the same branch of work; 
partly because they fear it might enable the employer to 
bargain with liis men as individuals under the cover of offering 
them work in a lower grade. 

The difficulty is a real one ; but perhaps Unionists would 
make greater efforts to overcome it, if they realized fully how 
which would ^"^^^ ^^ diminishes the National Dividend, and 
diminish in- therefore in the long run the average wa^'es 

constancy of ii i , ,, _, ° ° 

employment in tHroughout the country. For even when trade 
cernl?and""" ^^ ^risk, there are some men who need a stimulus 
therefore in to exertion closer at hand than the fear of bein<r 
left out of employment when trade declines; and 
when it does decline, the employers have to dismiss more 
men, and to dismiss them earlier, than would be necessary if 
their wages were graded according to their efficiency. The 
full extent of this evil is not readily perceived : for men look 
chiefly at their own trade ; and they think that, if there is 
less done by one set of men, there will remain more to be 
done by others. While some fall into the ever-recurring 
fallacy that there is a fixed Work-Fund, many forget that the 

1 It is commonly said by employers that ordinary men will do more than 
half as much again when they have a direct interest in their work as when 
they are paid by time. 

demand for the goods and services of each trade and pro- 
fession comes solely from the products of other trades and 
professions, and depends solely upon their activity ; and that 
therefore by cutting short the period of activity of one trade, 
they tend to throw others out of full work sooner than would 
otherwise have been necessary; that thus trade depression 
spreads and causes further interruptions of work, which again 
act and react on other trades. In fact, while the growing 
expensiveness of machinery and the growing breadth of 
markets give rise to strong forces constantly tending towards 
increased regularity of employment, the haste of some Unions 
to put their minimum rate of wages a little too high for those 
men whom the employer is not very anxious to have except 
in prosperous times, is one of the chief modern hindrances to 
settled conditions of work '. 

§ 12. The system of piece-work is seldom found in the 
finest and best of industrial relations. The most careful 

1 It should however be noticed that many Unions admit of classification to 
this extent that the variations in the minimum wages demanded by the 
different local branches are very great. There is no universal rule; but the 
general rule is that the minima are highest in and near London, and next 
m the maimfacturing districts; and that they gradually decrease with the 
distance from any great centre of the trade where a high standard of work 
IS needed and paid for. Thus the Amalgamated Society of Carpenters and 
Jomers reported in 1888 minima of 20s. in Penzance, 22s. in Barnstaple 25s in 
Taunton, 28s. in Bath and Worcester, 31s. in Bristol, 36s. in Birmingham and 
Manchester, and 42s. in some London suburbs. 

Where the wages are high, the standard of efficiency which a man must 
attam m order to earn the current wages of the district is high. If then a 
member of the Union at Bristol cannot get 31s. a week, he will be forbidden to 
work for less there, but the Union will pay the expense of his going say to 
Taunton where he will be able to get employment at the current wages On 
the other hand an exceptionally able carpenter in Taunton is likely to migrate 
to Bristol or London to get higher wages. By thus sending inefficient men to 
places where the standard of efficiency is low, and indirectly at least helping 
efficient men to go to places where it is high, Unions tend to perpetuate 
local inequalities of efficiency and therefore local inequilities of Time-wages 

A proposal is now under consideration in some Unions representing large 
trades to admit a httle more classification even with regard to members of the 
same Branch, in order that a larger percentage of workers may be eligible for 
admission to the Unions of their several trades. 


BOOK VI. CH. XIII. §^12, 13. 


and artistic work can seldom be measured by it; and in 
Piece-work is '^^^"7 trades, especially small trades, the work 
not suited to all varies SO much from bench to bench and from 
day to day that no regular tariff can be devised; 
and piece-work degenerates into contract work, in which 
the individual workman has to bargain alone with his 

But in the majority of trades, the various tasks can be 
But in others it S^^^^^ accurately; and when a list of prices for 
has great ad- them is agreed on, the employes L'rade themselves, 

vantages. , i , 

and yet present an unbroken phalanx in bar- 
gaining with their employers. Piece-work adds to the wages 
of the industrious workers; and it checks those habits of half- 
hearted work, which flourish in every rank of life where the soil 
is favourable. In many trades however for which it is appa- 
rently well suited the Unions either prohibit it, or at least 
avow dislike to it. 

In some cases this is caused by an undue eagerness of 

certain employers to reduce piece work rates 

Causes of dis- , ,, i ,i , , . 

like to it. When they have thought their men were taking 

too much money home. Some workmen oppose 
It because they desire to take things easily, and have perhaps 
a latent dislike to be graded according to their merits. And 
some oppose it because they tliink it makes work scarce, 
by inducing men to get through more of it than they otherwise 
would ; and here again come in the combined effects of a little 
trade-selfishness, and the fallacy of the fixed Work-Fund. 
Perhaps these imperfections of human nature, rather than 
Unionism, are further to be held responsible for 
whatever ground there may be for the complaint 
that some Unionists urge their fellows not to 
exert themselves over-much and absorb work that 
others might be glad to do'. 

1 This is not effected by general regulations; Imt in some workshops 
Unionist and Non unionist alike, social pressure is brought to bear on any one 

Unions not 
specially re- 
sponsible for 



§ 13. The old doctrine that where there is a will there is 
a way, is well illustrated by the success with 

. Trades that are 

which those trades, that are much subject to much subject 
the bracing action of foreign competition, have ^"["t^on"^"™" 
grappled with the difficulty of making Union 
action effective on behalf of the employed, and yet neither 
generally vexatious to the employer nor expensive to the con- 
sumer. The trades which make largely for foreign markets 
are more uniform in their methods of organization than 
many others. They not only buy their materials but they sell 
their products very much in open markets ; and special trade 
connections and trade secrets are, as a rule, of 

1 generally 

comparatively small importance m them : and adopt an 
these conditions have of course facilitated the enlightened 


minute classification and grading of different 
tasks. But there have been more powerful causes tending in 
the same direction. For a quick nemesis has followed on any 
quarrelsome or obstructive tendencies that have hindered in 

who works so hard as to set a standard of work higher than the others like ; 
and no doubt the presence of a Union element may increase this pressure. 
Again a foreman, if a member of the Union, is sometimes apt to conceal the 
faults of Unionists, and to give them an midue preference over abler 
Non-unionists. The control of a branch of a Union has occasionally got 
into the hands of men who have used its machinery to obtain full wages for 
very little work ; and though such cases are rare, the mischief which they 
cause is perhaps greater than that due to other kinds of Union action which 
have attracted a larger share of public attention. 

There are general rules against working overtime ; but as was indicated in 
the last Chapter, if moderate in character, they promote the efficiency of the 
worker, and are not iujui-ious to production in the long run. Overtime is 
sometimes forced on an unwilling employer by the resolve of some strong and 
able men to get very high wages at any cost. They are just the men on whom 
he can depend most in a difficulty ; so he is anxious to retain them ; and their 
mdividual demand for overtime overrides the collective opposition of the 
Union to it. 

Some Unions have hard and selfi^'-h rules limitmg very narrowly indeed 
the number of apprentices, and other learners. The effects of such limitations 
have already been discussed. But it should be added that in some cases they 
are prompted, though not justified, by the action of some employers who get 
bad work done at low wages almost exclusively by learners, for whom they do 
not endeavour to make any x^^^^^i^iou at the end of their time. 



' L 

• J 


BOOK VI. CU. XIII. § 13. 

any way, direct or indirect, the full efficiency of the human 
energies and the material capital invested in the trade; and 
any injury that a union may cause to the employers, not being 
capable of being passed on to the consumers, acts quickly on 
the supply of capital in the trade; and therefore reacts quickly 
on the wages of the employed. 

In trades that are largely subject to foreign competition, 

and employers ^-^erefore, those union officials who most fully 

lo%lTrll7^'^ realize the fundamental solidarity between the 

interests of employers and employed, and who 

oppose all demands which would needlessly hamper production 

or inflict loss on the employers, are those whose advice is 

found to bear the test of experience best: their influence 

generally increases, and their character spreads itself over 

the Union. Meanwhile similar causes tend generally to bring 

to the front those employers who give the most moderate 

and prudent counsels, and whose relations with their employes 

are most cordial. 

The workmen in these trades were the first to welcome 
and form machinery, and to accept payment by the piece. 

^oncfuatL. ^"""^ *^'^ employers in these trades were the first 
to welcome Trade-unions, to enter into negotia- 
tions with them, and to arrange conjointly with them Boards 
of Conciliation. In these Boards an equal number of repre- 
sentatives of employei-s and employed meet on equal terms ; 
they discuss now the minor details and now the broader prin- 
ciples of wage-arrangements with reference to the current con- 
dition of trade ; and when they can agree, as they generally 
can, their decision is in effect binding on the whole of their 
trade in their district. 

The character of their agreement varies with the nature of 
the trade ; but in all cases they aim at graduating the payment 
to the difficulty of each particular task, taking account in some 
cases of differences in the character of the raw material sup- 
plied, and in others of the delays caused by working with 



machinery that has not the very latest improvements. And 
in some trades they arrange lists of the prices to be paid for 
each of many thousand different tasks \ 

Arrangements of this kind, and even the much less satis- 
factory expedient of occasional appeals to Arbi- 

. . •.! , ,1 ■ T £ ^^ such trades 

tration, do not work easily without the aici oi unions often 

stronff organization on either side. Little but peatiy facih- 

o o tate business. 

mischief indeed comes from a weak Union, always 
ready to interfere, but seldom able to secure the faithful 
carrying out of an agreement, to which its own officers have 
been a party. But a strong Union, guided by able and far- 
seeing men who have a grave sense of responsibility, is found 
to enable a few minutes' quiet conversation to settle innumer- 
able petty disputes that in old times would have caused much 
delay and worry and loss of mutual good feeling. And, when 
the time comes for great changes in wages either way, the 
case is argued out by those who know exactly what are the 
real points of difficulty; and who, though there must be in 
the background an appeal to force, will yet have recourse to 

1 111 the coal and iron trades these payments are sometimes made to vary 
by a Sliding Scale with the price of the product. The standai-d price and the 
standard wage are usually taken as those prevailing at a date at which the 
condition of trade is recognized by both sides to have been normal ; and it is 
agreed that for every rise or fall of the price above or below its standard level, 
wages should rise or fall above or below their standard level by a correspondmg 
but generally smaller percentage. The percentage is generally smaller to 
correspond to the natural and beneficent tendency of fluctuations of wages to 
be less in extent than those of prices (See Book vi. Ch. vni. § 5). The 
Sliding Scale, when working at its best, arranges that those influences which 
short-period fluctuations in the price of a commodity are bound to exercise 
on the current wages of the labour by which they are made, shall work them- 
selves out smoothly and easily. But the basis of the Scale needs to be 
changed from time to time to correspond with altered conditions of trade, of 
production, and of the labour market generally. These changes at rare 
intervals give effect to the influence which the supply price of labour exercises 
in long periods on the price of the commodities raised by it. There are 
however special difficulties connected with Sliding Scales, some of which arise 
from the fact that in many of the trades to which they apply, foreign compe- 
tition is only a partial regulator, and somethmg approaching a local monopoly 
is not rare. 





BOOK VI. CH. XIII. S§ 13 — 15. 

industrial war only as a last resource. In such trades we may 
conclude confidently that Trade-unions on the whole facilitate 

§ 14. Other trades in which many able employers are not 
A strong Union sorry to be confronted by a fairly strong Union, 
who?e heTfu^^ are those in which the labour is not highly 
in a trade in skilled or specialized ; and the employers, know- 
not become too ing that in case of need they can bring in fresh 
strong. labour from a distance, have no fear of losing the 

effective control of their own businesses. In such cases the 
able and prudent Union leaders, having the confidence of 
their followers, and being able to make practically binding 
contracts on their behalf, may save more trouble and worry 
to the employer in small questions than they cause in large 
ones ; and they are more likely to hinder than promote such 
aggressive action as would force the employer to extreme 
measures. Many of the firms engaged in these trades are 
large, and use much fixed capital; they buy and sell every- 
thing in large quantities, and would be willing to pay a 
little extra for anything, labour included, to save them- 
selves the time and expense of making many detailed bar- 
gains. But while the employers in such cases may welcome 
the presence of a Union so long as it remains of moderate 
strength; their attitude would quickly be changed if any 
great measure of success should attend the endeavours that 
are now being made in these very trades to revive 
and extend old projects of Federation of Unions, 
and to make them irresistible by the use of the modern 
weapons of sympathetic strikes and boycotts ''. 

1 In some trades an employer having gromid of complaint against one of 
his employe's not unfrequently appeals to the Union secretary ; and he having 
investigated the matter compels the workman to make good his default under 
penalty of losing the support of the Union. 

2 An interesting history of earher attempts at Federation as well as of 
Trade Councils and Trade-union Congresses is given in Mr Howell's Conflicts 
of Capital and Labour, Ch. x. Throughout it all we find evidence of the high 




§ 15. The disturbing effects of Trade-union action are 
probably seen at their maximum in trades which have a 

education that Unionists are deriving from all these various forms of 
association. They help different trades to enter into one another's difficulties; 
to bring to bear on one another the force of a public opinion, which, though 
often one-sided, is on the whole beneficial; and lastly to smooth away any 
quarrels which may arise between different trades, especially with regard to 
apparent encroachments by one on another's province. For such quarrels are 
as frequent among modem Unions as they were among mediaeval Gilds. The 
chief discussions at Trade-union Congresses have however related to Lidustrial 
Legislation ; on which they have exerted a great, and on the whole a beneficial 

It is too early to form a sound judgment of the more ambitious new schemes 
for Federation. Under the guidance of able and resolute men they change their 
shapes rapidly to avoid first one difficulty and then another : it is possible they 
may attain a power, that would at present appear fraught with some danger 
to the State, and yet use that power with moderation. If so, they will do 
much towards changing the course of industrial history. For they aim at 
little less than controlling the general conduct of business in the interest of 
the workers, just as much being allowed to the employers (that is to capital 
and business power) as is needed to avoid gi-eatly checking the supply of 
capital and the activity of business. 

The method by which they propose to attain this result is generally to 
submit every dispute to the supreme Council of the Federation, who are em- 
l>owered— in some cases subject to the exphcit consent of the several Unions 
— to declare war against the firms which resist their decrees. The council 
may, for instance, order that tlie Federated trades shall not handle any goods 
coming from or going to those firms or even that they shall not work at all 
for any employer who refuses to cease deaUng with those firms. The poHcy 
which they propose is one requiring great judgment and self-control; qualities 
that have not been shown in some of the recent ventures of such Federations 
in America, AustraUa and England. But men learn by experience. 

In some recent schemes for an alhance between Co-operators and Trade- 
unionists in England, it has been proposed that co-operators should buy no 
goods that did not bear a Trade-union mark. It is certain that at present 
the worst conditions of labour are generally found among those who are 
making goods for the consumption of the working classes themselves; and it 
is quite right that they, and other people, should as far as possible avoid 
purchasing goods made under these conditions. But it is a strong measure to 
put it in the power of a Union to destroy the trade of an employer on the 
ground that he does not conform to their requirements, without making sure 
that those requirements are such as it is to the public interest to enforce. 
Errors of this kind will however coiTect themselves in time. And meanwhile, 
together wth some little harm and perhaps injustice, good will be done by 
an attempt that calls the attention of the working classes as consumers 
to the ultimate effect of a policy, of which they are apt to see only one side 
when they approach it as Trade-unionists. 




BOOK VI. CH. XIII. §§ 15, 16. 

Effects of com 
binations in 
trades not 
much subject 
to external 

monopoly of some special skill, and are not much influenced by 
the fear of foreign competition. It is in some of 
these trades that a bad use of Trade-union forces 
is most likely to show itself, a use that injures 
employers in the first instance, but in the long 
run is chiefly at the expense of the general public. 
And indeed it is true now, as it was in the time of the old Gilds, 
that in a trade which has any sort of monopoly, natural or 
artificial, the interests of the public are apt to be sacrificed 
most, when peace reigns in the trade, and employers and em- 
ployed are agreeing in a policy, which makes access to the trade 
difficult, stints production, and keeps prices artificially high. 

§ 16. So far we have discussed the influence of Union 
action on general wages, with reference to the question whether 
on the balance it renders business more difficult and uncertain, 
diminishes profits, and lessens the supply of capital and the 
energy of business men. But we have not yet considered the 
strongest grounds of the claim made by Unions that they do 
not on the whole lessen the National Dividend, and thereby 
bring into action forces which will render futile their effbrts to 
raise wages. We have still to consider that the strongest 
But Unionism ^^^^^ ^^ Unions to sustain wages depends on the 
must be judged influence they exert on the character of the 
influence on workers themselves ; though their position is not 
ofVe^woVkers. ^^ Strong as it might be made by the abandon- 
ment of all regulations and practices which 
needlessly limit the number of learners in skilled trades, or 
tend to deprive the workers of a good opportunity and a 
strong motive for exerting their best abilities to the full extent 
that is compatible with a due amount of rest and leisure. 

It is true that Trade-unionism has already done much of 

Unions found ^^^ ^^""^ ^^ **"^ direction. It found even the 
many workers artisan with but little independence and self- 
gave them'seif- respect, incensed against his employers, but with 
respect. ^^ well-considered policy for compelling them to 



treat him as an equal who had something to sell that they 
wanted to buy. This state of things would in any case have 
been much modified by the increase of wealth and of know- 
ledge ; which, together with the cessation of great wars and 
the opening of our markets freely for the workman's food, 
would have taken away much of that want and fear of hunger 
which depressed the physique and the moral character of the 
working classes. Unions have been at once a chief product 
and a chief cause of this constant elevation of the Standard 
of Life : where that Standard is high. Unions have sprung up 
naturally ; where Unions have been strong, the Standard of 
Life has generally risen ; and in England to-day few skilled 
workers are depressed and oppressed'. 

But there still remain trades in which special causes have 
lowered the independence of the workers and 
induced them to submit to conditions of hire ^^'^ ^^"^ «*"« 
and conditions of work, which constantly press traie^slnwhich 
them downwards. Selling their labour with- ^"ch help is 
out any efiective reserve to employers amon^^ 
whom there is but Httle effective competition, they have not 
partaken in the general progress. Relatively, if not abso- 
lutely, the price of their labour has fallen : and yet it is not 
always cheap to the employer; for long years and in some cases 
long generations of poverty and dependence, without know- 
ledge and without self-respect, have left them weak and 
unprofitable workers : and it is in relation to these classes 
that Trade-unionism is doing its most important work among 
the present generation of Englishmen. 

Its work has been successful in proportion as it has 
resisted the temptation to go counter to the economic forces 
of the time; and has directed its chief efforts to giving men 
a new spirit and a trust in and care for one another^; and 

1 Till recently workmen suffered mucli hardship and wrong from some bad 
masters Unions have checked this partly by explaining the law to the work- 
man and puttmg it in force for him. 

I -I 








BOOK VI. CH. XIII. ^ 16 — 18. 

inciting them to avail themselves of those economic forces 
that can be made to work on their side. 

Thus for instance under the old regime at some of the 

London Docks, the inevitable uncertainty of 
Docks under employment was increased through lack of due 
the old regime, consideration; men were kept waiting about 
needlessly for the chances of an odd job, till their spirit 
was gone; they turned their little earnings to very bad 
account, and they were at once among the most miserable, 
and the dearest workers in the country. A Trade-union giving 
them some confidence in themselves and their fellows, insisting 
on the removal of conditions which were very injurious, and 
finally appealing to public sympathy for funds which enabled 
them to put a reserve price on their labour, was able 
to give them a wonderful start: and though they have 
not in every case known how to use their victory with 
moderation and wisdom, they are now on a higher level than 

There is an almost equal waste of human life, though of 

another kind in some other industries, such as 

• So called . . i • i u 

"Sweated" nail-makmg, and hand-sewing, in wmcn old- 
trades, fashioned methods vainly struggle for life. These 
are the industries in which the evils of the so-called sweating 
system are greatest, and the workers are most helpless. The 
forces of the time are moving them slowly on to better methods 
of work, and therefore higher wages : but, if they could take 
combined action, the movement would be hastened; and the 
growth of Trade-unions among them would be partly a result 
and partly a cause of their rise from their present low state 
to a higher one. 

§ 17. Though there is no longer room for Unionism to 
There is much render services of this order to skilled workmen, 

aid that Unions ^j^ -^ ^^-jj ^^^^ ^Yisit it can do even for them. 

can still render 
to the moral 
character of 
the workers, 

Unions all can, and most of them in fact do, 
exercise an elevating influence by punishing 



any member who conducts himself badly, or who is frequently 
out of employment from excessive drinking. There is much 
moral strength in the espHt de corps that makes a man anxious 
not to bring disgrace on his Union, and in the just pride 
with which he contemplates the provision that its Benefit 
and Provident Funds make to secure him from needing the 
aid of public or private charity. 

The better the influences which Unions exert in these 
respects the more likely is any increase of wages 
that they may obtain, to be turned to account in ^h^"^ '^ so far as 
promoting the industrial efliciency of the present they l?e* Hkeiy 
and the coming generation of workers. In so %^lLntiT^ 
far as they do this, the Unions have an effective 
answer to the argument, recently given, that any check to the 
growth of capital caused by a rise of wages at the expense of 
profits is likely to be cumulative. If they do what they can 
to make labour honest and hearty, they can reply that an 
addition to the wages of their trade is as likely to be invested 
in the Personal Capital of themselves and their children, as an 
increase in profits is to be invested in Material Capital : that 
from the national point of view persons are at least as re- 
munerative a field of investment as things : and that invest- 
ments in persons are cumulative in their effects from year to 
year and from generation to generation ^ But this answer is 
not open to those Unions, or branches of Unions, that in effect 
foster dull and unenergetic habits of work. 

§ 18. It would be a great gain if the net influence of 
Unions on wages could be clearly traced in 
history. But this cannot be done. For many a^'scmai^ing 
of the most important effects of Trade-union ^^e/nfl^enceof 
action are so remote from their causes as to "cJTbseJ^a-" 
escape notice, unless they are carefully sought **°°* 
out; and even then they are so intermingled with the effects 

1 See above Ch iv. §§ l, 6. In England, and to an even greater extent in 
Amenca, the material savings of working men are themselves^oSerable. 







Unions and 
\vages in 

of other and, in some cases, more powerful causes, that their 
true meaning is not easily read^. 

Let us however consider the relation of Trade-unions to 
some of the broad movements of wages noticed 
in the first half of the preceding Chapter. Trade- 
unions have been stronger in England than on the 
Continent, and in America; and wages have been 
higher in England than on the Continent, but lower than 
in America. Their strength in England was partly due to 
that force of character, which was the chief cause of the 
excess of English over Continental wages. Their weakness 
in America was partly due to the very causes that made the 
wages of the American working man so high ; viz. his restless 
enterprise, his constant opportunities of bettering himself by 
changing his abode and his occupation, and the abundance of 
land on which he could settle as an independent owner. The 
highest wages of all that the world has known have been in 
some parts of California and Australia ; but they were due to 
causes which excluded the action of Unions. Gradually real 
wages in those places have fallen — perhaps not absolutely, but 
— relatively to the rest of the Western world; and in their 
desire to retard that fall, men have betaken themselves to 
Unionism of a specially active and adventuious character. But 
it is not easy to decide whether in so doing they have not 
checked the growth of wages by retauding the influx of 
capital, as much as they have increased it by modifying in 
their own favour the distribution of the joint product of 
labour and capital. Again, not long ago wages were very low 
in Scotland; but they have already risen nearly up to the 
English level, as a result of the general tendency of local 
inequalities of wages to diminish, and in spite of the fact that 
Unions are weaker in Scotland than in England. Unionism 
is however growing fast in Scotland ; and in shipbuilding, for 

1 Compare the footnote on pages 355, 356. 



which the Clyde has great natural advantages. Unionism is 
as strong and wages as high as in England. 

Again, those occupations in which wages have risen most 
in England happen to be those in which there 
are no Unions : they are those kinds of domestic wagerin""* 
service and those employments for women and different 
children in which there has been a great increase ^''^'"P*^""^- 
of demand, while the increase of supply has been checked by 
the growing unpopularity of domestic service, and the unwilling- 
ness of the better grades of working men to let their wives 
leave home and their children leave school early. Again, few 
of those branches of skilled labour which have had strong 
Unions for the last fifty years, can show as great a rise in 
wages as has been secured in most unskilled occupations in 
which physical strength is required, even though they have 
had no effective Unions. 

It is true that Unions claim to have made life more 
pleasant in manufacturing and other industries, 
and thus to have increased the inducements inference that 
needed to keep people in domestic service. And u nio^n^on " °^ 
it is further true that, in so far as Unionist lY^f^^'^ 
action may have raised the general level of life 
of some classes of workers, it has helped to raise the intelligence 
and character, and therefore the wage-earning power of their 
children, among whom are many domestic servants. But, even 
if we take an optimist estimate of these influences, such facts 
as those just quoted prove that the direct influence of Unions 
on wages is small relatively to the great economic forces of 
the age. They prove this, but they prove no more than this. 

And on the other hand the advocates of Unionism can 
bring forward a long series of facts to prove that inference that 
when a comparison is made of wages in two o^^^er things 
similar trades, or in two branches of the same Un^lns'do*^ 
trade, or in the same branch of the same trade thi^^^d^ef hi*" 
in two places; if it so happens that neither of which they are 
them is favoured relatively to the other by the ouTe'rr^^*** 





BOOK VI. CH. XIII. §§ 18, 19. 

economic changes of the age, then that one which has the 
stronger Unions has almost invariably the higher wages; 
and that one in which the strength of Unions is increasing 
most rapidly is that in which wages are rising fastest \ 

Such facts prove that, other things being equal, wages in 
trades in which there are strong Unions are likely to be 
higher than in those in which there are not. But they do not 
afford a conclusive answer to those who hold that a Union can 
obtain a relative rise in wages in its trade only by means which 
indirectly cause a greater loss in other trades; and that 
therefore the effect of Unionism is to lower general wages. 

It should also be noted that all such facts lose some of 
their significance, when it is remembered that a rise of wages, 
even when caused by a general increase in the prosperity of a 
trade, is nearly always followed, as statistics show, by an 

1 There are several cases of trades with strong Unious, iii which the rise of 
wages has been retarded by causes which may easily escape observation. For 
instance, the rise of the wages of compositors has been hindered by the 
diffusion of education which, while it much increases the demand for their work, 
prevents the power of reading and writing from having any longer a monopoly 
value: their wages have however risen relatively to the incomes of clerks 
who are affected by the same cause but have no Union. Again, skilled iron- 
founders were heavily struck by the invention of machinery, the use of 
which required mere physical strength, and enabled many navvies to earn 
10«. a day at iron-founding at the very time when the Unemployed List of 
the Ironfomiders' Union was quoted before the Conunission on the Depression 
of Trade, as strong evidence of a growing dearth of employment. And again, 
the engineers have suffered, nominally at least, from the fact that — to say 
nothing of those who are below the Union standard — there is a constant 
increase in the number of men who confine themselves to comparatively 
simple work in the management of machines, and are not highly skilled all- 
round men. The average incomes to-day of those who entered the engineers' 
trade thirty years ago are very high indeed. Not a few are employers, 
many more are foremen and in positions of trust in all kinds of industries ; 
and many are earning exceptionally high wages for delicate and varied work 
in small, but high class businesses. A great many of these however are not 
members of the Union at all; and tliose who are, owe very little at present 
(whatever they may have done in the past) to the aid of the Union. 

All these three trades have to do with branches of production for which 
the demand is increasing much faster than in proportion to the population. 
They all have very strong and well-managed Unions; and yet all have to 
contend with strong and not very obvious hindrances to a rapid rise in their 
minimum wage. 



increase in the strength of the Union. For the rise, however 
caused, increases the men's confidence in their leaders, and 
makes them more willing as well as more able to pay their 
entrance fees and subscriptions ; and further it increases the 
numbers of those who are qualified for admission by earning 
the standard wages. 

§ 19. The direct evidence of wage statistics is then in- 
conclusive. But, on the whole, they tend to ^ 

r> , . 1 J General 

confirm the conclusions to which our general conclusions, 
reasonings seemed to point ; and we may now 
sum them up. 

In trades which have any sort of monopoly the workers, by 
limiting their numbers, may secure very high wages at the ex- 
pense partly of the employers, but chiefly of the general com- 
munity. But such action generally diminishes the number of 
skilled workers and in this and other ways takes more in the ag- 
gregate from the real wages of workers outside, than it adds to 
those of workers inside : and thus on the balance it lowers average 
wages. Passing from selfish and exclusive action of this sort, we 
find that Unions generally can so arrange their bargaining with 
employers as to remove the special disadvantages 
under which workmen would lie if bargaining as uni^ns"n°^ 
individuals and without reserve ; and in con- wages in par- 
sequence employers may sometimes find the path 
of least resistance in paying somewhat higher wages than 
they would otherwise have done. In trades which use much 
fixed capital a strong Union may for a time divert a great 
part of the aggregate net income (which is really a Quasi-rent) 
to the workers ; but this injury to capital will be partly trans- 
mitted to consumers ; and partly, by its rebound, reduce em- 
ployment and lower wages. Some of those, who have caused 
this result, may escape it themselves by changing their oc- 
cupation or their abode. But in trades in which competition 
from a distance is effective, the nemesis follows quickly : and, in 
these trades more than others, Unions direct their energies to 

i: I' 


BOOK VI. CH. XIII. § 19. 

maintaining a moderate level of wages by means that do not 

hamper production. Other things being equal, the presence 

of a Union in a trade raises wages relatively to other trades. 

But the influence which Unions exert on the average level 

, of wao^es is less than would be inferred by look- 
influence of ° ^ ^ '' 

Union action ing at the influence which they exert on wages 
generaK^ils ^^ ^^^^ particular trade. When the measures 
drawbacks and which they take to raise wages in one trade have 
the effect of rendering business more diflicult, or 
anxious, or impeding it in any other way ; they are likely to 
diminish employment in other trades, and thus to cause a greater 
aggregate loss of wages to other trades than they gain for 
themselves, and to lower and not raise, the average level of 
wages. For a fall in the rate of profits exerts an influence that 
is real, though less than used to be once supposed, in causing 
capital to emigrate or even to be consumed, and in causing men 
of business ability to emigrate or slacken their energies ; and 
this influence is cumulative. 

The power of Unions to raise general wages by direct 
means is never great ; it is never sufficient to contend success- 
fully with the general economic forces of the age, when their 
drift is against a rise of wages. But yet it is sufficient 
materially to benefit the worker, when it is so directed as to 
co-operate with and to strengthen those general agencies, which 
are tending to improve his position ^orally and economically. 
And it will be so directed if the following conditions are 
satisfied. Firstly, Unions must aim at making 
business easy and certain : this is already done by 
formal and informal Boards of Conciliation in 
some trades, especially such as produce largely 
for foreign markets. Secondly, they must aim at 
raising the Standard of Life among the workers of the present 
and the coming generation by fostering habits of sobriety and 
honesty, independence and self-respect : this is done in 
different degrees by all Unions ; and whatever influence they 

under which 
Unions may 
raise general 



exert in this direction is cumulative. Thirdly, they must aid 
as many as possible of the rising generation to acquire industrial 
skill, and to join the higher paid ranks of labour : this calls 
for some self-sacrifice, and is inconsistent with any attempt to 
raise very high the wages in skilled trades by making the 
entrance to them artificially difficult. Fourthly, they must 
strive to develop the great stores of business power and in- 
ventive resource that lie latent among the working classes, so 
that, production being economical and efficient, the National 
Dividend may be large ; and that, business power being cheap. 

and the share going as Earnings of Management being 

relatively small, that which remains for wages may be high. 
The training which Unionists get from the management of 
Union affairs, though highly beneficial to them as men 
and as citizens, is yet not exactly what is wanted for this 
end. But Unions might do much towards it, by under- 
taking particular contracts and even general business on 
their own accounts; and by aiding and promoting all forms 
of co-operative enterprise, and especially such as open the 
greatest number of opportunities to men of natural business 
ability to find free scope for their constructive and originating 
faculties'. Fifthly, they must be always specially careful to 
avoid action by which one class of workers inflict a direct 
injury on others. Contests between Unions contending for the 
same field of employment — as for instance between Unions of 

1 Tims sacrificing the shadow for the substance, they should where 
necessary, relax the rigid forms of some of their own rules in favour of small 
genuine co-operative productive societies in the few trades in which such 
societies can successfully contend with the great natural difficulties by which 
they are opposed. And in particular they should encourage productive 
branches of distributive stores in which responsibility for risks and power of 
experunent are very nearly in the same hands; and in which the business 
energies of men of the working class can be vivified and prepared for taking 
an important part in increasing the National Dividend and diminishing the 
share of it which goes as Earnings of Management. (Some aspects of this 
question are further considered in an address by the present writer to the 
Co-operative Congress in 1889.) 


BOOK VI. CH. XIII. ^ 19, 20. 

between the 
moral and the 
aspects of the 

shipwrights and carpenters, or plumbers and fitters — attract 
their full meed of attention; but more importance really 
attaches to the injuries which one trade inflicts on others by 
stinting the output of the raw material which they have to 
use, or by throwing them out of work through a strike in 
which they have no concern. 

§ 20. As Mill says: "Except on matters of mere detail, 
there are perhaps no practical questions even 
among those which approach nearest to the 
character of pure economic questions which admit 
of being decided on economic premises alone;" 
and it is alike unscientific and injurious to the 
public welfare to attempt to discuss men's conduct in industrial 
conflicts without taking account of other motives beside the 
desire for pecuniary gain. The world is not ready to apply in 
practice principles of so lofty a morality, as that implied in 
many socialistic schemes, which assumes that no one will 
desire to gain at the expense of an equal loss of happiness to 
others. But it is ready, and working men among others are 
ready, to endeavour to act up to the principle, that no one 
should 'desire a gain which would involve a very much greater 
loss of happiness to others. Of course the loss of £1 involves 
much less loss of happiness to a rich man than to a poor man. 
And it would not be reasonable to ask working-men to abstain 
from a measure which would give them a net gain of £1 at 
the expense of a loss of SOs. to profits, unless it could be shown 
that this loss would react on wages in the long run. But 
many of them are willing to admit that no Union should adopt 
a course which will raise its own wages at the expense of a 
much greater total loss of wages to others; and if this principle 
be generally adopted as a basis of action, then nearly all the 
e\41 that still remains in the policy of Unions can be removed 
by such a study of economic science, as will enable them to 
discern those remote effects of their action "which are not 
seen," as well as those immediate results " which are seen." 



Thus Union policy as a whole is likely to be economically 
successful provided Unionists as individuals and p ^ ^ ^^^j ^g. 
in their corporate capacity follow the dictates of sponsibiiity of 
morality directed by sound knowledge. In this ^" ic opinion, 
respect Unions derive an ever-increasing assistance from public 
sympathy and public criticism ; and the more they extend the 
sphere of their undertakings by Federation and International 
alliances, the more dependent do tliey become on that sym- 
pathy and the more amenable to that criticism ; the larger 
the questions at issue, the greater is the force of public 
opinion. Public opinion, based on sound economics and just 
morality, will, it may be hoped, become ever more and more 
the arbiter of the conditions of industry \ 

1 The strength and the responsibility of public opinion as regard the modern 
developments of trade combinations of all kinds are discussed in an address 
by the present writer to the Economic Section of the British Association, 
which is republished in the Statistical Journal for Dec. 1890. And something 
further is said on the meaning of the phrase " a fair rate of wages " with 
special reference to Conciliation and Arbitration in an Introduction by h^m to 
Mr L. L. Price's Industrial Peace, a book which, supplemented by Prof. 
Munro's papers on Sliding Scales, throws much light on an important class of 
problems. The general history of Unions is told in the writings of Mr and Mrs 
Webb, Mr Howell and Mr Burnett, also in the Reports of a Committee of the 
National Association for Promoting Social Science in 1860, and of the Royal 
Commission on Trades Unions in 1866 — 9. A great deal of information bearing 
on these and other questions discussed in this Chapter is published by the 
Commission on Labour. 

Among the many aspects of Unionism with which it has not been possible 
to deal at j^resent are the subtler and more indirect influences of foreign 
competition; and the claim of Unions to aid, or sometimes even to compel the 
action of employers in Regidating Trade. No doubt there are occasions on 
which a trade cannot continue to produce at its full strength without forcuig 
the sales of its wares on an inelastic market at prices disastrous to itself. But 
since every check to the production of one trade tends to throw others out of 
employment, what is called the Regulation of trade often tends to increase 
instability of prices, of wages and of employment in some directions more than 
it diminishes them in others; and its general adoption would probably 
increase the uncertainties of trade and of work. If we assume however that 
it is reasonable for those in a trade to try to regulate it, it seems to follow 
that the employed should have their say in the matter; and some slight 
weight must be conceded to that objection to Sliding Scales, which urges that 
under them wages are reduced when the employers accept lower prices, 
without the workers being consulted as to whether they would prefer to 
produce less, so that higher prices could be got and higher wages paid. 






§ 1. It is the business of economics, as of almost every other 

science, to collect facts, to arrange and interpret them, and to draw 

inferences from them. All the devices for the discovery of the relations 

between cause and effect, which are described in treatises 

Induction and ^^ scientific method, have to be used in their turn by the 
deduction in- '' 

separable. economist : there is not any one method of investigation 

which can properly be called the method of economics ; 
but every method must be made serviceable in its proper place, either 
singly or in combination with others. And as the number of combina- 
tions that can be made on the chess-board is so great that probably no 
two games exactly aUke were ever played ; so no two games which the 
student plays with nature to wrest from her her hidden truths, which 
were worth playing at all, ever made use of quite the same methods 
in quite the same way. 

But in some branches of economic inquiry and for some purposes, it 
is more urgent to ascertain new facts, than to trouble ourselves with the 
explanations of those which we already have. While in other branches 
there is still much uncertainty as to whether those causes of any event, 
which lie on the surface and suggest themselves at first, are both true 
causes of it and the only causes of it ; and in these branches it is even 
more urgently needed to scrutinize our reasonings about facts which we 
already know, than to seek for more facts. 

The reasoning from particular facts to general principles is called 
induction ; the reasoning from general principles to particular facts is 
called deduction. Prof. Schmoller, an eminent German historian and 
economist, says well: "Induction and deduction are both needed for 
scientific thought as the right and left foot are both needed for walking. 
...They rest on the same tendencies, the same beliefs, the same needs of 
our reason. 


1 See above, p, 28. 



§ 2. There is however no scope in economics for long chains of 
deductive reasoning ; that is for chains in which each link is supported, 
wholly or mainly, by that which went before, and without 
obtaining further support and guidance from observation ^f°^"f g^^^^Yng 
and the direct study of real life. Such chains can be ^^t profitable, 
made in astronomy and in some other branches of 
physical science, in which the character and strength of all the chief 
causes at work are known so exactly that we can predict beforehand 
the effect of each singly, and thence infer the combined effect of all. 
But it cannot be done as yet in chemistry ; for we cannot be quite sure 
how a new combination of chemical elements will work until we have 
tried. And when drugs are used medicinally, it is often found that they 
affect different people in different ways : it is not always safe to give a 
large dose of a new drug to one patient, trusting to the fact that it has 
worked well in an apparently similar case. And economics has as various 
and uncertain a subject-matter to deal with as has medical science. 

Thus if we look at the history of such strictly economic relations as 
those of credit and banking, of trade-unionism or co-operation, we 
find that modes of working, that have been generally successful at 
some times and places, have uniformly failed at others. The difference 
may sometimes be explained simply as the result of variations in general 
enlightenment, or of moral strength of character and habits of mutual 
trust ; but sometimes the explanation is more difficult. 

§ 3. On the other hand, there is need at every stage for analysis, 
that is, for taking to pieces each complex part and studying the relations 
of the several parts to one another and to the whole : Explanation of 
and in doing this we are constantly making inferences, observed facts 
that is, short steps of reasoning both inductive and involves 
deductive. The process is substantially the same whether 
we are explaining what has happened or predicting what is likely to 
happen. Explanation and prediction are really the same mental 
operation ; though they are worked in opposite directions, the one from 
effect to cause, the other from cause to effect. 

Observation may tell us that one event happened vnth or after 
another, but only by the aid of analysis and reason can we decide 
whether one was the cause of the other, and if we reason hastily we are 
likely to reason wrong. Wider experience, more careful inquiry, may 
show that the causes to which the event is attributed could not have 
produced it unaided ; perhaps even that they hindered the event, which 
was brought about in spite of them by other causes that have escaped 


If we are dealing with the facts of remote times we must allow for the 


I ' 

:; I 




on the nature 
of economic 

changes that have meanwhile come over the whole character of economic 
life : however closely a problem of to-day may resemble in its outward 
incidents another recorded in history, it is probable that a thorough 
scientific examination will detect a fundamental difference between their 
real characters. Till this examination has been made, no valid argu- 
ment can be drawn from one case to the other. 

§ 4. The part which systematic scientific reasoning plays in the 
production of knowledge resembles that which machinery plays in the 
production of goods. For when the same operation has 
to be performed over and over again in the same way, 
it generally pays to make a machine to do the work; 
and where there is so much changing variety of detail 
that it is unprofitable to use machines the goods must be 
made by hand. Similarly in knowledge, when there are any processes of 
investigation or reasoning in which the same kind of work has to be done 
over and over again in the same kind of way, then it is worth while to 
reduce the processes to system, to organize methods of reasoning and to 
formulate general Laws. 

It is true that there is so much variety in economic problems, 
economic causes are intermingled with others in so many different ways, 
that exact scientific reasoning will seldom bring us very far on the way 
to the conclusion for which we are seeking. But it would be foolish to 
refuse to avail ourselves of its aid, so far as it will reach : — ^just as foolish 
as would be the opposite extreme of supposing that science alone can 
do all the work, and that nothing will remain to be done by practical 
instinct and trained common sense. 

Natural instinct will select rapidly and combine justly considerations 
which are relevant to the issue in hand ; but it will select chiefly from 
those which are familiar ; it will seldom lead a man far below the surface, 
or far beyond the limits of his personal experience. And we shall find 
that in economics, neither those effects of known causes, nor those causes 
of known effects which are most patent, are generally the most important. 
"That which is not seen" is often better worth studying than that 
** which is seen." Especially is this the case when we are trying to go 
behind the immediate causes of events and trying to discover the 
causes of those causes (causes causantes). 

It is sometimes said that physical laws are more universally true and 
less changeable than economic laws. It would be better to say that an 
economic law is often applicable only to a very narrow range of circum- 
stances which may exist together at one particular place and time, but 
which quickly pass away. When they are gone, the law, though still true 
as an abstract proposition, has no longer any practical bearing ; because 



the particular set of causes with which it deals are nowhere to be found 
acting together without important disturbance from other causes. 
Though economic reasoning is of wide application, we cannot insist too 
urgently that every age and every country has its own problems ; and 
that every change in social conditions is likely to require a new develop- 
ment of economic doctrines. 

It is true also that human effort may alter the conditions under which 
people live, and their characters, and thus may affect the economic laws 
that will be valid in the next generation. It may for instance destroy 
the conditions under which the most helpless of our match-box makers 
have been formed ; in the same way as it has substituted sheep whose 
law of life it is to mature early, for the older breeds which did not attain 
nearly to their full weight till their third year. 

The " normal " conditions with which economics deals are constantly 
being changed, partly through the unconscious influence of general social 
progress, partly through conscious and deliberate endeavour. And while 
with advancing knowledge we are constantly finding that economic 
analysis and general reasoning have wider and wider applications, and 
are learning in unexpected ways to see the One in the Many and the 
Many in the One ; we are also getting to understand more fully how 
every age and every country has its own problems, and how every change 
in social conditions is likely to require a new development of economic 






r,^ ^ V..- ^^'^ .""Tv'' '"'''* * P*'™" 8et8 from purchasing at a low 
pnce things which he would rather pay a high price for than io withoj 
has aheady been called his consumers' surplus. Our aim now is to apply 

If T r l"""!™"^' «"Tl«s «' ■» "id in estimating roughly some 
of the benefits which a person derives from his environment or his 

In order to give definiteness to our notions, let us consider the case of 
tea purchased for domestic consumption. Let ns take the case of a man 
who, If the price of tea were 20s. a pound, would just be 
induced to buy one pound annnaUy ; who would just 
be induced to buy two pounds if the price were 14. 
three pounds if the price were 10.., four pounds if the 

if*i, • ^^^^T^^'-^^Ponndsifthe price were 4.., six pounds 

^the price were 3.., and who, the price being actually 2... does pSse 
seven pounds We have to investigate the consume^' s^l„s which he 
derives from his power of purchasing tea at 2.. a pound 

The fact that he would just be induced to purchase one pound if the 
price were 20. proves that the total enjoyment or satisfaction which he 
derives from that pound is as great as that which he could Xlin by 
spendmg 20. on ofter things. When the price falls to 14.., he could a 
he chose, continue to buy only one pound. He would then get for ij 
what was worth to him at least 20,. ; and he will obtain a sullus sai^! 
faction worth to him at least 6.., or in other words a consu.Zs"su^^,L 

thus showing that he regards it as worth to him at least 14.. He obtains 
for 28.. what is worth to him at least 20.. + 14.. ; i.e. 34.. His Z^Z 
satisfaction is at all events not diminished by buying it. but rSS 

^ See above, p. 80. 

surplus in 
relation to the 
demand of an 



worth at least 6«. to him. The total utility of the two pounds is worth 
&t least 34s., his consumers' surplus is at least 6&-. 

When the price falls to 10s., he might, if he chose, continue to buy 
only two pounds ; and obtain for 20s. what was worth to him at least 
34s. , and derive a surplus satisfaction worth at least 14s. But in fact he 
prefers to buy a third pound : and as he does this freely, we know that 
he does not diminish his surplus satisfaction by doing it. He now gets 
for 30s. three pounds; of which the first is worth to him at least 20s., 
the second at least 14s., and the third at least 10s. The total utility of 
the three is worth at least 44s., his consumers' surplus is at least 14s., 
and so on. 

When at last the price has fallen to 2s. he buys seven pounds, which 
are severally worth to him not less than 20, 14, 10, 6, 4, 3, and 2s. or 
69«. in all. This sum measures their total utility to him, and his 
consumers* surplus is (at least) the excess of this sum over the 14s. 
he actually does pay for them, i.e. 45s. This is the excess value of the 
satisfaction he gets from buying the tea over that which he could have 
got by spending the 14s. in extending a little his purchase of other 
commodities, of which he had just not thought it worth while to buy 
more at their current prices; and any further purchases of which at 
those prices would not yield him any consumers* surplus. In other 
words, he derives this 45s. worth of surplus enjoyment from his con- 
juncture, from the adaptation of the environment to his wants in the 
particular matter of tea. If that adaptation ceased, and tea could not 
be had at any price, he would have incurred a loss of satisfaction at least 
equal to that which he could have got by spending 45s. more on extra 
supplies of things that were worth to him only just what he paid for 

The first pound was probably worth to him more than 20s. All that 
we know is that it was not worth less to him. He probably got some 
small surplus even on that. Again, the second pound was probably 
worth more than 14s. to him. All that we know is that it was worth at 
least 14s. and not worth 20s. to him. He would get therefore at this 
stage a surplus satisfaction of at least 6s., probably a little more. 

The significance of the condition that he buys the second pound of 
his own free choice is shown by the consideration that if the price of 14s. 
had been offered to him on the condition that he took two pounds, he 
would then have to elect between taking one pound for 20s. or two 
pounds for 28s. : and then his taking two pounds would not have proved 
that he thought the second pound worth more than 8s. to him. But as it 
is, he takes a second pound paying 14s. uucouditioually for it ; and that 
proves that it is worth at least 14s. to him. 






It is sometimes objected that as he increases his purchases, the 
urgency of his need for his earlier purchases is diminished, and their 
utility falls ; therefore we ought to continually redraw the earlier parts 
of our list of demand prices at a lower level, as we pass along it towards 
lower prices (I e. to redraw at a lower level our demand curve as we pass 
along it to the right). But this misconceives the plan on which the list 
of prices is made out. The objection would have been valid, if the 
demand price set against each number of pounds of tea represented the 
average utility of that number. For it is true that, if he would pay just 
20«. for one pound, and just 14«. for a second, then he would pay just 
34«. for the two ; i.e. 17s. each on the average. And if our list had had 
reference to the average prices he would pay, and had set 17s. against the 
second pound ; then no doubt we should have had to redraw the list as 
we passed on. For when he has bought a third pound the average utility 
to him of each of the three will be less than that of 17s. ; being in fact 
14s. %d. if, as we go on to assume, he would pay just 10s. for a third 
pound. But this difficulty is entirely avoided on the plan of making out 
demand prices which is here adopted ; according to which his second 
pound is credited, not with the 17s. which represents the average value 
per pound of the two pounds ; but with the 14s., which represents the 
additional utility which a second pound has for him. For that remains 
unchanged when he has bought a third pound, of which the additional 
utility is measured by 10s. ^ 

§ 2. We may now pass from the demand of an individual to that 
of a market. If we neglect for the moment the fact that the same 
sum of money represents different amounts of pleasure 
a mark^. " ° to different people, we may measure the surplus satisfac- 
tion which the sale of tea affords, say, in the London 
market, by the aggregate of the sums by which the prices shown in a 
complete list of demand prices for tea exceeds its selling price. 

Let us then consider the demand 'curve DD' for tea in any large 

1 Again it has been objected :— " Of what avail is it to say that the utility of an 
income of (say) £100 a year is worth (say) £1000 a year ? " There would be no avail in 
saying tliat. But there might be use, when comparing life in Central Africa with life in 
England, in saying that, though the things which money will buy in Central Africa may 
on the average be as cheap there as here, yet there are so many things which cannot be 
bought there at all, that a person with a thousand a year there is not so well off as a 
person with three or four hundred a year here. If a man pays Id. toll on a bridge, which 
saves him an additional drive that would cost a shilling, we do not say tliat the penny 
is worth a shilling, but that the penny together with the advantage offered him by the 
bridge (the part it plays in his conjuncture) is worth a shilling for that day. Were the 
bridge swept away on a day on which he needed it, he would be in at least as bad 
a position as if lie liad been deprived of eleven pence. 

consumers' surplus. 


Fig. (10). 

Let OH be the amount which is sold there at the price HA annually, 
a year being taken as our unit of time. Taking 
any point M in OH let us draw MP vertically 
upwards to meet the curve in P and cut a 
horizontal line through A in R. We will 
suppose the several lbs. numbered in the order 
of the eagerness of the several purchasers: 
the eagerness of the purchaser of any lb. being 
measured by the price he is just willing to pay 
for that lb. The figure informs us that OM 
can be sold at the price PM\ but that at any 
higher price not quite so many lbs. can be 
sold. There must be then some individual who will buy more at the 
price PM, than he wUl at any higher price; and we are to regard the 
OMih. lb. as sold to this individual. Suppose for instance that PM 
represents 4s., and that OM represents a million lbs. The purchaser 
described above is just willing to buy his fifth lb. of tea at the price 4s 
and the OMih or millionth lb. may be said to be sold to him. If ^iTand 
therefore RM represent 2s., the consumers' surplus derived from the 
OJfth lb. IS the excess of PM or 4s. which the purchaser of that lb. would 
have been willing to pay for it over RM the 2s. which he actually does 
pay for it. Let us suppose that a very thin vertical paraUelogram is 
drawn of which the height is PM and of which the base is the distance 
along Ox that measures the single unit or lb. of tea. It will be con- 
venient henceforward to regard price as measured not by a mathematical 
straight line without thickness, as PM; but by a very thin paraUelogram 
or as It may be called a thick straight line, of which the breadth is 
in every case equal to the distance along Ox which measures a unit or lb 
of tea. Thus we should say that the total satisfaction derived from the 
OiUth lb. of tea is represented (or, on the assumption made in the last 
paragraph above is measured) by the thick straight line iJfP; that the 
price paid for this lb. is represented by the thick straight line MR and 
the consumers' surplus derived from this lb. by the thick straight line RP 
Now let us suppose that such thin paraUelograms, or thick straight lines* 
are drawn for aU positions of M between O and H, one for each lb. of tea' 
The thick straight lines thus drawn, as MP is, from Ox up to the demand 
curve wiU each represent the aggregate of the satisfaction derived from a lb. 
of tea ; and taken together thus occupy and exactly fill up the whole area 
DOHA. Therefore we may say that the area DOHA represents the 
aggregate of the satisfaction derived from the consumption of tea 
Again, each of the straight lines drawn, as MR is, from Ox upwards as 
far B.B AG represents the price that actually is paid for a lb. of tea. 





These straight lines together make up the area COHA ; and therefore 
this area represents the total price paid for tea. Finally each of the 
straight lines drawn as RP is from AG upwards as far as the demand 
curve, represents the consumers' surplus derived from the corresponding 
lb. of tea. These straight lines together make up the area DC A ; and 
therefore this area represents the total consumers' surplus that is derived 
from tea when the price is AH. But it must be repeated that this 
geometrical measurement is only an aggregate of the measures of benefits 
which are not all measured on the same scale except on the assumption 
just made above. Unless that assumption is made the area only 
represents an aggregate of satisfactions, the several amounts of which 
are not exactly measured. On that assumption only, its area measures 
the volume of the total net satisfaction derived from the tea by its 
various purchasers. 


as to rent 
in relation 
to cost. 



§ 1. The relations between rent and cost of production are obscure, 
and intricate. But the following statement sets forth the central, and 
comparatively simple, idea which underlies them all. 

We start from the position that, when a thing is produced for sale in 
a free market, its price must in the long run be enough to remunerate 
the producers for every part of their output. The price 
must cover the cost of that part of the produce which is 
raised at the greatest disadvantage ; and therefore every 
other part must yield a surplus above its direct cost. 
These facts have been indicated in two classical doc- 
trines ; viz. : — that the price of the whole produce is determined by the 
expenses, or money cost, of production on the margin of cultivation; 
and that rent does not enter into cost of productioii. These phrases are 
true in the senses in which they were meant ; but they are frequently 

It is certainly true that the expenses of raising agricultural produce 
are best estimated on the margin of cultivation. That is, they are best 
estimated for a part of the produce which either is raised on land that 
pays no rent because it is poor or badly situated ; or, is raised on land 
that does pay rent, but by applications of capital and labour which 
only just pay their way, and therefore can contribute nothing towards 
the rent. It is these expenses which the demand must just cover : for if 
it does not, the supply will fall off, and the price will be raised till it 
does cover them. Those parts of the produce which yield a surplus 
will generally be produced even if that price is not maintained ; there- 
fore their surplus can not govern the price : and since no surplus is 

I See above, p. 203. 



yielded by that portion of the produce, the expenses of production of 
Cautions which do take direct part in governing the price, there- 

needed in 



fore no surplus enters into that (money) cost of produc- 
tion, which gives the level at which the price of the whole 
supply is fixed. Thus we see that there are three 
cautions to be observed in interpreting these classical doctrines :— 

In the first place, Bent is here taken as another name for the 
surplus produce which is in excess of what is required to remunerate 
the cultivator for his capital and labour ; and if the cultivator owns the 
land himself, he of course retains this surplus. 

Next, the marginal application of capital and labour, by the return to 
which we estimate the amount required to remunerate the farmer, is not 
necessarily applied to inferior land ; it is on the margin of profitable 
expenditure on land of any quality. 

Lastly, the doctrines do not mean that a tenant farmer need not 
take his rent into account when making up his year's balance-sheet. 
When he is doing that, he must count his rent just in the same way as 
he does any other expense. What they do mean is that, when the 
farmer is doubting whether it is worth his while to apply more capital 
and labour to the land, then he need not think of his rent ; for he will 
have to pay this same rent whether he applies this extra capital and 
labour, or not. Therefore if the marginal produce due to this additional 
outlay seems likely to give him normal profits, he applies it : and his 
rent does not then enter into his calculations. 

The classical doctrines may then be restated thus :— (1) The amount 
Restatement o^ produce raised, and therefore the position of the 
of the classical margin of cultivation (i.e. the margin of the profitable 
°^ "*^* application of capital and labour to good and bad land 

alike) are both governed by the general conditions of demand and supply. 
They are governed on the one hand by demand ; that is, by the numbers 
of the population who consume the produce, the intensity of their need 
for it, and their means of paying for it ; and on the other hand by 
supply; that is, by the extent and fertility of the available land, and the 
numbers and resources of those ready to cultivate it. Thus cost of 
production, eagerness of demand, margin of production, and price of 
the produce mutually govern one another. (2) But rent takes no part 
in controlling the general conditions of demand and supply or their 
relations to one another. It is governed by the fertility of land, the 
price of the produce, and the position of the margin : it is the excess of 
the value of the total returns which capital and labour applied to land 
do obtain, over those which they would have obtained under circum- 
stances as unfavourable as those on tlie margin of cultivation. (3) If 


the cost of production were estimated for parts of the produce which do 
not come from the margin, a charge on account of rent would of course 
need to be entered in this estimate ; and if this estimate were used in an 
account of the causes which govern the price of the produce, then the 
reasoning would be circular. For that which is wholly an effect would 
be reckoned up as part of the cause of those things of which it is an 
effect. (4) The cost of production of the marginal produce can he 
ascertained witlwut reasoning in a circle. Tfie cost of production of 
other parts of the produce cannot. The cost of production on the margin 
of the profitable application of capital and labour is that to which the 
price of the whole produce tends, under the control of the general con- 
ditions of demand and supply. 

Thus differences in the rent (or producer's surplus) of land result 
from differences in its net advantages, account being taken both of 
its situation and its fertility : but all that is required for the existence 
of rent is that the demand for produce should be sufficient to cause some 
of it to be raised under conditions which call into play the tendency to 
diminishing return. Rent would exist even if all land were equally 
advantageous, provided only that the population were just a little more 
than sufficient to bring it under cultivation. On the outskirts of a new 
country, where some of the best land still remains uncultivated and free 
to the first comer, there is no rent. 

This argument refers to the price of agricultural produce as a whole. 
The case is somewhat different if we confine our attention to one 
particular crop, as for instance oats^. 

1 The argument is continued in Principles, V. viii., where it is shown that when the 
doctrine is so modifled as to be applicable to one particular crop, it is then applicable 
also to the rent of building land in relation to the price of the goods manufactured or 
>Varehoused on it : and so on. 





The farmer's 

§ 1. The fanner pays "rent" to his landlord without troubling 
himself to distinguish how much of the annual net value 
of his land is due to the free gift of nature, and how 
much to the investment of capital by his landlord in the 
improvement of the land, and in erecting buildings on it. Now the 
income derived from farm buildings, or houses, is clearly of the same 
character as the income derived from durable machines; and that 
income is popularly classed with profits more often than with rent. But 
yet the farmer's habit of speaking has much justification. For the 
incomes derived from appliances for production made by man have 
really something analogous to true rents. 

The net incomes derived from appliances for production already 
made, may be called their quasi-rents : partly because we shall find 
Quasi-rent. *^**' when we are considering periods of time too short 

to enable the supply of such appliances to respond 
to a change in the demand for them, the stock of them has to 
be regarded as temporarily fixed. For the time they hold nearly the 
same relation to the price of the things which they take part in pro- 
ducing, as is held by land, or any other free gift of nature, of which the 
stock is permanently fixed ; and whose net income is a true rent. Let us 
take an illustration from manufacture. 

§ 2. Let us suppose that an exceptional demand for a certain kind 
Illustration o^ textile fabrics is caused by, say, a sudden movement 

relating to of the fashions. The special machinery required for 

manufacture. making that fabric will yield for the time a high income, 
governed by the price that can be got for the produce, and consisting of 
the excess of the aggregate price of that produce over the direct outlay 
(including wear-and-tear) incurred in its production; and the quasi-rent, 
or net income, from the machinery will be for the time greater than 
normal profits on the original investment. 

If later on the tide turns, and the demand is less than had been 
expected; the factories with the most imperfect appliances, and the 

1 See above, p. 214. 


worst machinery in other factories will be thrown out of work; while 
those machines, which it is just worth while to keep in work, will just pay 
the actual expenses of working them, but will yield no surplus. But the 
excess of the price got for the goods made by the better appliances over 
their wear-and-tear, together with the actual expenses of working them, 
will be the income which these appliances yield during the short period 
of depression. This quasi-rent or net income derived from the machinery 
will in this second period be less than normal profits on the original 

These remarks may be extended. Appliances for production are of 
many different kinds : they include not only land, factories and machines, 
but also business ability and manual skill. The owner of any one of 
those will not generally apply it to produce anything, unless he expects 
to gain in return at least enough to compensate him for the immediate 
and special trouble, sacrifice and outlay involved in this particular 
operation, and which he could escape by declining to undertake it. 

In short periods the supply of these various appliances for pro- 
duction — whether machinery and other material plant, or specialized 
skill and ability — has not time to be fully adapted to demand ; and the 
producers have to adjust their supply to the demand as best they can 
with the appliances already at their disposal. On the one hand there is 
not time materially to increase those appliances if the supply of them is 
deficient; and on the other, if the supply is excessive, some of them 
must remain imperfectly employed, since there is not time for the 
supply to be much reduced by gradual decay, and by conversion to 
other uses. The particular income derived from them during those 
times, does not for the time affect perceptibly the supply, nor therefore 
the price, of the commodities produced by them : it is a surplus of total 
receipts over Prime (money) cost, governed by the more or less accidental 
relations of demand and supply for that time. And this excess has 
enough resemblance to that excess value of the produce of land over the 
direct cost of raising it, which is the basis of rent as ordinarily under- 
stood, to justify us in calling it a Quasi-rent. 

A Quasi-rent differs however from a true Rent in this way. If 
true Rent ceased, those gifts of nature which are free and Rent proper 
imperishable would remain undiminished, and be ready and Quasi- 
to contribute their part to production as before. But if *^"** 
the Quasi-rent from any class of appliances for production not made by 
man fell so low that it did not amount in the long run to normal profits 
on the investment of capital and effort required to sustain the supply 
of those appliances ; then those appliances would dwindle, and would 
not contribute their part to production as before. In long periods, on 



the other hand, there is time to adjust the resources of supply to 

§ 3. The general principle under discussion may then be put thus. 
Restatement The price of anything and the amount of it that is pro- 
°rin 1 T^** ^"°^*^ ^^ together governed by the general relations of 

pnncip e. demand and supply: the price just covers the expenses 

of production of that part of this amount which is raised at the greatest 
disadvantage ; every other part yields a surplus above its direct cost ; 
and this surplus is a result and not a cause of the selling price. For the 
price is governed by the relations of supply and demand ; and while, of 
course, the surplus does not aflfect the demand, so neither does it affect 
the supply, since it is yielded only by a part of the produce which would 
be produced even at a lower price. 

When we are taking a broad view of normal value extending over a 
very long period of time, when we are investigating the causes which 
detei-mine normal value " in the long run," when we are tracing the 
"ultimate." effects of economic causes, then the income that is derived 
from capital in these forms enters into the payments by which the 
expenses of production of the commodity in question have to be covered, 
and it directly controls the action of the producers who are on the 
margin of doubt as to whether to increase the means of production or 
not. But, on the other hand, when we are considering the causes which 
determine normal prices for a period which is short relatively to that 
required for largely increasing the supply of those appliances for pro- 
duction, then the stock of these appliances has to be taken as fixed, 
almost as though they were free gifts of nature. The shorter the period 
which we are considering, and the slower the process of production of 
those appliances, the less part will variations in the income derived 
from them play in checking or increasing the supply of the commodity 
produced by them, and in raising or lowering its supply price ; and the 
more nearly true will it be that, for the period under discussion, the net 
income to be derived from them is to be regarded as a producer's surplus 
or quasi-rent. 

This doctrine is however difficult, and easily misunderstood. Further 
study is required before it can be safely applied to complex issues ». 

1 Some further study will be found in PHnciples, V. ix, part of which is reproduced 
in this Appendix. 




§ 1. The simplest account of the causes which determine the 
distribution of the national income is that given by the French econo- 
mists who just preceded Adam Smith; and it is based 
upon the peculiar circumstances of France in tha latter ^^^in of the 
half of last century. The taxes, and other exactions w^ag^are"* 
levied from the French peasant, were then limited only fixed by the 
by his abihty to pay; and few of the labouring classes P"*"* °^ . 
were far from starvation ; and therefore the Physiocrats, °^''^^^^*^^- 
as the French economists of the time were called, assumed for the sake 
of simplicity, that there was a natural law of population according to 
which the wages of labour were kept at starvation limit. They did not 
suppose that this was true of the whole working population, but the 
exceptions were so few, that they thought that the general impression 
given by their assumption was true. 

Again, they knew that the rate of interest in Europe had fallen during 
the five preceding centuries, in consequence of the fact that "economy 
had m general prevailed over luxury." But they were impressed very 
much by the sensitiveness of capital, and the quickness with which it 
ev^ed the oppressions of the tax-gatherer by retiring from his grasp • 
and they therefore concluded that there was no great violence in the 
supposition that if its profits were reduced below what they then were 
capital would speedily be consumed of migrate. Accordingly they 
assumed, again for the sake of simplicity, that there was something Uke 
a natural, or necessary rate of profit, corresponding in some measure to 
the natural rate of wages ; that if the current rate exceeded this necessary 
level, capital would grow rapidly, till it forced down the rate of profit to 
that level; and that, if the current rate went below that level, capital 
would shrink quickly, and the rate would be forced upwards again 
They thought that, wages and profits being thus fixed by natural laws 
the natural value of eveiything was governed simply as the sum of wages 
and profits required to remunerate the producers. 

^ See above, p. 258. 




The ^vestem 
world has out- 
grown the 
facts on which 
that opinion 
was based. 

Adam Smith saw that labour and capital were not at the verge of 
starvation in England, as they were in France. In 
England the wages of a great part of the working classes 
were sufficient to allow much more than the mere neces- 
saries of existence; and capital had too rich and safe 
a field of employment there to be likely to go out of 
existence, or to emigrate. So when he is carefully weighing his words, 
his use of the terms "the natural rate of wages," and "the natural 
rate of profit," has not that sharp definition and fixedness which it 
had in the mouths of the Physiocrats ; and he goes a good way towards 
explammg how they are determined by the ever-fluctuating conditions 
of demand and supply. He even insists that the liberal reward of labour 
"increases the industry of the common people"; that "a plentiful sub- 
sistence increases the bodily strength of the labourer ; and the comfortable 
hope of bettering his condition, and of ending his days perhaps in ease 
and plenty, animates him to exert that strength to the utmost. Where 
wages are high, accordingly, we shall always find the workman more 
active, diligent and expeditious, than where they are low ; in England 
for example, than in Scotland; in the neighbourhood of great towns thai^ 
in remote country places i." And yet Adam Smith sometimes falls back 
into the old way of speaking, and thus makes careless readers suppose 
that he beUeves the mean level of the wages of labour to be fixed by 
an iron law at the bare necessaries of life. 

Malthus2 again, in his admirable survey of the course of wages in 
England from the thirteenth to the eighteenth centuries, shows how their 
mean level oscillated from century to century, falling sometimes down to 
about half a peck of corn a day, and rising sometimes up to a peck and 
a half or even, in the fifteenth century, to about two pecks: a height 
beyond which they have never passed except in our own day. But 
although he observes that " an inferior mode of living may be a cause as 
well as a consequence of poverty," he traces this effect almost exclusively 
to the consequent increase of n^imbers ; he does not anticipate the stress 
which economists of our own generation lay on the influence which habits 
of hvmg exercise on the efficiency, and therefore on the earning power of 
the labourer. 

Eicardo's language is even more unguarded than that of Adam Smith 
and Malthus; his whole treatment of wages is in some respects less 
satisfactory than theirs. It is true, indeed, that he says distinctly 3.— 
"It 18 not to be understood that the natural price of labour estimated in 

1 Wealth of NaUonn, Bk. i. eh, viii. 
3 Eicardo's Principles, v. 

2 Political Economy, iv. 2. 


food and necessaries is absolutely fixed and constant... It essentially 
depends on the habits and customs of the people." But, having said this 
once, he does not take the trouble to repeat it constantly; and in conse- 
quence many readers forget that he says it; and suppose him to believe 
that the population always increases very rapidly as soon as wages rise 
above the bare necessaries of life, and thus causes wages to be fixed by 
"a natural law" to the level of these bare necessaries. This law has 
been called, especially in Germany, Eicardo's "iron" or "brazen" law: 
many German socialists believe that this law is in operation now even in 
the western world; and that it will continue to be so, as long as the plan 
on which production is organized remains " capitalistic" or "individual- 
istic " ; and they erroneously claim Eicardo as on their side. 

Mill followed Malthus in dwelling on those lessons of history which 
show that, if a fall of wages caused the labouring classes to lower their 
standard of comfort "the injury done to them will be permanent, and 
their deteriorated condition will become a new minimum tending to 
perpetuate itself as the more ample minimum did before." 

But it is only in our own generation that a careful study has begun 
to be made of the effects that high wages have in increasing the efficiency 
not only of those who receive them, but also of their children and grand- 
children. In this matter the lead has been taken by Walker and other 
American economists ; and the application of the comparative method of 
study to the industrial problems of different countries of the old and new 
worlds is forcing constantly more and more attention to the fact that 
highly paid labour is generally efficient and therefore not dear labour ; a 
faot which, though it is more full of hope for the future of the human 
race than any other that is known to us, will be found to exercise a very 
complicating influence on the theory of distribution. 

§ 2. At the beginning of this century, great as was the poverty of 
the English people, the peoples of the Continent were poorer still. In 
most of them population was sparse, and therefore food 
was cheap ; but for all that they were underfed, and could 
not provide themselves with the sinews of war. France, 
after her first victories, helped herself along by the forced 
contributions of others. But the countries of Central 
Europe could not support their own armies without 
England's aid. Even America, with all her energy and national resources, 
was not rich; she could not have subsidised Continental armies. The 
economists found the explanation chiefly in England's capital, which was 
much greater than that of any other country. Other nations were envious 
of England, and wanted to follow in her steps ; but they were unable to 
do so, partly indeed for other reasons, but chiefly because they had not 

Origin of 
extreme pro- 
minence given 
to dependence 
of w^ages on 





capital enough Their annual income was required for immediate con. 
sumption. There was not in them a large class of people who h^ a 

Zt 7 V r:f '^ "* '^' "^'^^ *^^^ ^'^ -* --^ to consumTat 
thaT wc^^Z f 1 T' """'^ ''"'*' '' "^'^"^ ^^^^^- --d otter things 
m^Zf "^^ ^^'"'' ^^^ ^"^^^ "°"^^^ ^* *^ Produce a krger store of 
thmgs for future consumption. A special tone was given to theb 
arguments by the scarcity of capital everywhere, even in England" 

W K fw"!? ^r^'i'^^' °^ ^^^^^ °^ tt^ «^d of machineiy ; and 
lastly, by the folly of some followers of Rousseau, who were telling the 
workmg classes that they would be better off without any capital at all 

In consequence, the economists gave extreme prominence to the 
stetements; first, that labour requires the support of capital, i.e. of good 
clothes, &c., that have been already produced; and secondly, that labour- 
requires the aid of capital in the form of factories, stores of raw materiaT 
f ; 1, Ti'"\ ! workman might have supplied his own capital, but in 
fact he seldom had more than a little store of clothes and furniture and 
perhaps a few simple tools of his own-he was dependent for every hing 
else on the savmgs of others. The labourer received clothes ready to 

them.^ The capitahst received a spinning of wool into yam, a wLing of 
yarn into cloth or a ploughing of land, and only in a fe; cases com 
modities ready for use, coats rea^y to be worn, or bread ready to be eate^ 
There are, no doubt, important exceptions, but the ordiLy baTga^ 

^ rcTJ""!. r'-'"^ T^''''^ " *^^* *^^ wage-receiver gets comm'an^ 
over commodities m a form ready for immediate consumption, and in 

IZatT '^'"'Z-^'' employer's goods a stage further towards being 
ready for immediate consumption. But while this is true of most 
employees, it is not true of those who finish the processes of production 
For mstance, those who put together and finish watches, give to thei^ 
sZi7"/r T' \°--°d^ties in a form ready for immediate con 
sumption, than they obtain as wages. And if we take one season of the 
year with another, so as to allow for seed and harvest time, we find that 
workmen as a whole hand over to their employers more finished com- 
modities than they receive as wages. There is, however, a rather forced 
sense m which we may perhaps be justified in saying that the earnmgs 
of labour depend upon advances made to labour by capital. Por-not to 
take account of machinery and factories, of ships and railroads-the 

th^cTwZ 7.'^°^'"' '"^ ^'^^ '^' '"^ ^^*^^^^1« '^ ^-ious stages 
which will be worked up into commodities consumed by them, represent 

a far greater provision of capital for their use than the equivalent of the 

monthT f /^\*^^^ °^^^^ to the capitalist, even when they work for a 
month for him before getting any wages. 

Such are the facts which economists of the present as well as of 
earlier times have wished to express by saying that all labour requires the 
support of capital, whether owned by the labourer or by someone else ; 
and that when anyone works for hire, his wages are, as a rule, advanced 
to him out of his employer's capital— advanced, that is, without waiting 
till the things which he is engaged in making are ready for use. These 
simple statements have been a good deal criticized, but they have never 
been denied by anyone who has taken them in the sense in which they 
were meant. 

Unfortunately, however, some of the older economists were not 
content to leave the matter there. They went further and said that the 
amount of wages was limited by the amount of capital; and this state- 
ment cannot be defended ; at best it is but a slovenly way of talking. It 
has suggested to some people the notion that the total amount of wages 
that could be paid in a country in the course of, say a year, was a fixed 
sum. If by the threat of a strike, or in any other way, one body of 
workmen got an increase of wages, they would be told that in consequence 
other bodies of workmen must lose an amount exactly equal in the 
aggregate to what they had gained. Those who have said this have 
perhaps thought of agricultural produce, which has but one harvest in 
the year. If all the wheat raised at one harvest is sure to be eaten before 
the next, and if none can be imported, then it is true that if anyone's 
share of the wheat is increased, there will be just so much less for others 
to have. But this does not justify the statement that the amount of 
wages payable in a country is fixed by the capital in it, a doctrine which 
has been called * the vulgar form of the Wages-Fund theory. ' 

§ 3. The doctrine of the Wages-Fund received countenance from 
some careless expressions into which Mill was betrayed by his desire to 
treat the problem of Distribution in his second Book 
before that of Exchange in his third. The attempt was 
necessarily a failure. But he collects all the various 
elements of the problem in the third chapter of his 
fourth Book: and there the relations of labour and 
capital are presented symmetrically, and the Wages-Fund does not appear. 

The proposition that Industry is limited by capital, was often in- 
terpreted so as to make it practically convertible with the Wages-Fund 
theory. It can be explained so as to be true : but a similar explanation 
would make the statement that " capital is limited by industry" equally 
true. It was however used by Mill chiefly in connection with the 
argument that the aggregate employment of labour cannot generally be 
increased by preventing people, by Protective duties or in other ways, 
from satisfying their wants in that manner which they would prefer. 

Some of Mill's 
are badly 



The eflFects of protective duties are very complex and cannot be discussed 
here; but MiU is clearly right in saying that m general the capital, that 
IS appUed to support and aid labour in any new industry created by such 
duties, "must have been withdrawn or withheld from some other, in 
which it gave, or would have given, employment to probably about' the 
same quantity of labour which it employs in its new occupation." Or, 
to put the argument in a more modern form, such legislation does not 
prima facie increase either the national dividend or the share of that 
dividend which goes to labour. For it does not increase the supply of 
capital; nor does it, in any other way, cause the marginal efficiency of 
labour to nse relatively to that of capital. The rate that has to be paid 
for the use of capital is therefore not lowered; the national dividend is 
not mcreased (in fact it is ahnost sure to be diminished) ; and as neither 
labour nor capital gets any new advantage over the other in bargaining 
for the distribution of the dividend, neither can benefit by such legislation. 
The first Fundamental Proposition of Mill's is closely connected with 
his fourth^ viz. that Demand for commodities is not demand for labour- 
and this again expresses his meaning badly. It is true that those, who 
purchase any particular commodities, do not generally supply the capital 
that is required to aid and support the labour which produces those 
commodities: they merely divert capital and employment from other 
trades to that for the products of which they make increased demand. 
But Mill, not contented with proving this, seems to imply that, to spend 
money on the direct hire of labour is more beneficial to the labourer than 
to spend it on buying commodities. Now there is a sense in which this 
contains a Uttle truth. For the price of the commodities includes 
profits of manufacturer and middleman; and if the purchaser acts as 
employer, he slightly diminishes the demand for the services of the 
employing class, and mcreases the demand for labour as he might have 
done by buying, say, hand-made lace instead of machine-made lace. 
But this argument assumes that the wages of labour will be paid 
as in practice they commonly are, while the work is proceeding- and 
that the price of the conunodities will be paid, as in pract/ce it 
commonly is, after the commodities are made: and it wUl be found that 
in every case which MiU has chosen to illustrate the doctrme, his 
arguments imply, though he does not seem to be aware of it, that the 
consumer when passing from purchasing commodities to hiring labour, 
postpones the date of his own consumption of the fruits of labour. And 
the same postponement would have resulted in the same benefit to 
labour if the purchaser had made no change in the mode of his ex- 
penditure ^ 

1 A fuUer discussion of the Wages Fund is given In PHnciples. VI. u. 12. 



Words printed in Italics are technical terms; aiid the numbers immediatehj 
following them are those of the 2)a(/es on which they are defined. 

Abstinence 136 (see Waiting) 
Activities in relation to wants 69 — 60. 

Agents of production, classification 

of 85 
Agriculture 87—102, 161; English 

system of 310—17 
Allotments 315 
American, economy of high wages 

262, 413; land tenure 310, 311 
Apprenticeshijis 124, 379 n. 
Arbitration 381 
Aristotle 3 
Auxiliary caintal 50 

Babbage 149 

Barter 190—1 

Biology and economics 139 

Bohm-Bawerk 283 n. 

Boycott 367, 382—3 

Brentano 395 n. 

Burnett 361 n., 375 n., 395 n. 

Business management (see Contents^ 
Book IV. Clis. XI., XII. and Book yi. 
Chs. vn., VIII. See also Manage- 
ment, earnings of) 

Caimes 65 n. 

Capital, definitions of 45 — 50; stan- 
dard use of term 46; growth of 
129—138, 250-1; adjustment of 
to business ability 176—7, 374—6; 
demand for in a trade 240—242 ; in 
relation to wages in general 256 — 8 ; 
Mill's propositions on 415 — 16 


Carlyle 22 

Character, influence of work on 1; 
influence of poverty on 1 — 2 

Child, Sir Josiah 136 

Children, employment of 14; mor- 
tality of 115, 119 ; education of 122 

Christianity, influence of 10 

CirculatiJtcf capital 50 

Climate, influence of 9, 112 

Coke 99 

Collective goods 38; use of wealth 83 

Com2)etitio7i, fundamental character- 
istics of 5—8, 256; its tendency to 
apportion wages to efficiency 239; 
principle of substitution a form of 

Competitive supply 223 

Composite demand 222; supply 223 

Conciliation 348 

Conjuncture 80, 400 

Constant return 180 

Consumer's surplus 79; analysis of 
80—1, 400—4; how affected by 

ethical aspects of 
356; of different 

monopohes 231 
Consumption 42; 

83—4, 247—9, 

grades 70 
Consumption capital 50 
Conventional necessaries 44, 253 
Co-operation 170; its difficulties 171— 

2; hopes for its future 173, 293; in 

agriculture 308 n., 382—3 n., 393 n. 
Cost of marketing (see Marketing) 
Cost of production 195; its relation 






to ntihty and to value 200—201 • 

to rent 202—3 
Cree 366 n. 
Cumulative effects with regard to 

labour 268, 270—71, 273, 275—6 
Custom 9, 268 n., 307 n. 

Darwin 139 
Definition 33 

Demand, elasticity of 69—74 ; grada- 
tions of 61— 8; Laioo/67; element 
of time in 67-8, 211-12; increase 
oj 66; of rich and poor 69 — 71* 
for necessaries 72; joint 218; de- 
nved 218^ composite 221; curve 
^bn- point 65 n.; price 63, 193; 
schedule 64 
Depression of trade 328—9 
Derived demand 218 
I>ifftrentiation 139 — 140 
BiminisUng return, law of, or ten- 
dency to 91, 94—5 ; Eicardo's state- 
ment of was inaccurate 100; in 
relation to miaes and fisheries 102 
Diminishing utility, law of 62 
Discounting future pleasures and 

pleasurable events 77 
Distribution in relation to exchange 
233, 415 ^ 

Distribution of means between wants 
according to marginal utiUties 75; 
of a commodity between different 
uses 75—8, 239 n. 
Division of labour 142—150 
Domestic industry 163 — 4 

servants 275 n., 389 
Dose 95 

Dose of capital and labour 95 n. 

Earnings, theories of 248, 411—16- in 
relation to efficiency 239 — 40, 245— 
250, 260-2, 329, 349; their relation 
to supply of labour 127—8, 245— 
250; general rate of 256—8; effi- 
ciency 260; piece-ioork 260; tash 
261; real said nominal 2&^', supple- 
mentary 265; effect of progress on 
337—345 (see Contents, Book vi. 
Chs. I — V.) 

Earnings of management 52 Csee 

Earnings of uixdertaking 52 
Economic freedom 8; growth of 9— 


Economic law 26, 398 — 9 
•Economic man ' 19, 26 

Economic motives 1^—22; not ei:- 
clusively selfish 21—2, 133; gene- 
rally measurable 19 

Economics, provisional definition 1 • 
a modern science 4—5; conceme.! 
chiefly with measurable motives 
19--22; the chief questions which 
It mvesti-ates 29-30; practical 
issues which point to these inqui- 
3cf^?^^' methods of study o;f 

Education, 122—4; as a national in- 
vestment 124—5 

Efficiency earnings 260; tend to 
equality 260—2 

Elasticity of demand 69 

England, growth cf free industry and 
enterprise in 10—18; her geo- 
graphical advantages 10; growth 
of population of 107—110; land 
tenure of 306, 309-317; her gains 
from cheap transport 331—2 

Equilibrium 190, 198 

Expenses of production 195 

External economies 150; goods 35 

Factories, growth of 11—12 
Eactors of production 195 
"Farmer," American 309—10 
Farms, large and small 311—14 
Fashion, mfluence of 57 — 8 n 

^^^^t^J ? ^*"^' general conditions 
of 88—9 n. ; relation to tune and 
place 99—100 

Field of employment 326 

Fisheries 102 

Fixed cai ital 50 

Footpounds, measurement by 111 
•ion^o*''^^' ^^gland's gains from 

Free competition 8, 196, 256 

Free goods 36 

Freedom, economic 8 

Freedom of industry and enterprise 8 

General ability 122 

George, Heniy 329 n. 

Giffen 138 n., 339 n., 344 n. 

Goods 34; classification of 34—^ 

Goschen 344 n. 

Government undertakings 170 

22^7^°**^' "'^^^^^'g o^ 186, 
Grading of labour 375— € 
Greece, Ancient 10 
Gross earnings of management 178 




Gross income 51 

Gross interest 281; analysis of 284 — 
6 ; does not tend to equality 286 

Hours of labour, limitation of 348 — 

House industry 163 — 4 
Howell 382 n., 395 n. 

Improvements in agriculture 317 n. 

Income, its relation to capital 45 — 6; 
gross 51; net 51; money 51; social 
62; per head of population 16 n. 

Increasing return 92, 180; its rela- 
tion to supply price 180 — 1, 197 — 8, 

Induction and deduction 396 

Industrial organization 139 — 141 

Industry is limited by capital 415—16 

Instrumental capital 50 

Insurance against risk 227 — 9, 285—6 

Integration 140 

Interchangeable parts 144 — 5 

Interest 52, 136; its relation to de- 
mand for capital 240 — 2; rate of 
how determined 250 — 2 ; gross 283 
—-4; net 283 — 4; changes ijx rate 
of 337 

Internal economies 150 

Internal goods 35 

Investment of capital 204 — 7 

Ireland, land tenure in 316 

Iron or brazen law of wages 248, 413 

Irregularity of employment 265, 344 

Japan 249 

Jevons 185, 242 n. 

Joint demand 218 

Joint products 222 — 3 

Joint-stock companies 168 — 170, 292 

Joint supply 222 

Labour 42, 85; its supply price 86; 
skilled and unskilled 120—1; efli- 
ciency of 111 — 128 ; disputes, illus- 
tration of derived demand 218 — 
221 ; inconstancy of employment of 
264 — 5, 344 — 5 ; limitation of hours 
of 348 — 357 (see Earnings) 

Labour market, peculiarities of 268 — 

Land 85, 87, 252 ; changes in value of 

Land tenure 307—317 

Law a statement of tendency 23; 
social and economiclaws 26; "nor- 

mal" the adjective corresponding 
to "law " in this use 26 — 7 ; nonujJ 
action not necessarily right action 
27, 398—9; for Law of demand 
etc. see under Demand etc. 

Leisure 356 — 7 

Leroy Beaulieu 344 n. 

Localized industries 151 — 5 

Long and short periods, classification 
of 216 

"Long run," meaning of the phrase 

Luxuries, demand for 70 — 1 

Machinery 143 — 150 

Malthus 103-^, 108, 412, 413 

Man, both the end and an agent in 
production 103, 128, 248 

Management, earnings of 52; gross 
and net 178; various forms of ad- 
justed by law of substitution 289 — 
293 (see Contents, Book vi. Chs. 
VI., vu., vin.) 

Manufacture 156; improvements in 
11 n. 

Margin of cultivation 95 

profitableness 206 

Marginal demand-price 63 
dose 95 
purchase 62 
return 95 
utility 63 

Market 184—9 

Marketing 158—9, 226—8, 304—5 

Marriage-rate, causes affecting 105 

Marx, Karl 283 n. 

Material and non-material Goods 35 

Maximum satisfaction 190 

Metayer system 308, 310 n. 

Methods of study 396—9 

Migration, hindrances to in Middle 
Ages 107; from country to town 

Mill, John Stuart on capital 50, 415 — 
16 ; on grades of labour 126-— 7 ; on 
cost of production 195 n., 378 ; on 
wages 413—16, 394 

Mines 102 

Minimum wage 377 

Mobility of labour 125— «, 377—9 

Money 39; its use as a measure cf 
motive 19 — 21; changes in mar- 
ginal utility of 21, 63 — 4, 80—1 

Money cost of production 195 

Money income 51 

Monopolies 230 — 1 


Monotony of life, and in some cases 
of work, diminished by machinerv 
148—9 ^ 

Mortality, rate of in different occupa- 
tions 115 n.; in town and coTmtrv 
116 n. ^ 

Munro 395 

National dividend 47, 235; estima- 
tion of 52—3 ; a stream not a fund 

National income 47, 52, 235 

National wealth 38 

Necessaries, for life, for ejficiency, 

coni7C7i<tona;42— 4,247— 9; demand 
for 70—1 

Net advantages 51, 266 — 7 

Net earnings of management 178 

Net income 50 — 1 

Net interest 283 — 4 ; tends to equality 

Net product of labour 210 
Netherlands, agriculture in 310—11 
New countries, causes of high wages 

and interest in 326 — 9 
Nominal iva^es 263 
Normal 26—7, 399; elasticity of term 

208—9 ; supply price 196—200 (see 

Contents, Book v. Chs. iii— v.) 

Open spaces, public interest in 160. 

Organization of industry 139 — 141 
Organized markets 187 — 8 

Partnership 167 

Peasant proprietors 291, 308—10. 

Periods, long and short 208—217 
Personal goods 35 
risJcs 285 
7cealth 37 
Petty 305 

Physiocrats 248, 411, 412 
Piece-icork wages 260, 378—380 
Plato 139 

PoHtical Economy. (See Economics) 
Poor-law, its influence on population 

109 ; on saving 132 
Population, doctrine of 103 — i ; causes 

that govern the growth of 105— 

110, 250; its pressure on the means 

of subsistence 101, 181—3, 248—9. 

Poverty, a cause of degradation 2. 

267, 270—1 

Pnce 89; a measure of utility 63 

Price, L. L. 395 n. 

Prime cost 206 — 7 

Production on a large scale 156—161. 

Profit sharing 172 
Profits 52, 295 ; how far tendency to 

equality 295—300; "fair" rate of 

300; in relation to fluctuations of 

price 301—2 
Progress, its influence on values 326 — 

Protection 415—16 

Quasi-rent 230, 214 n., 302 n., 370 n. 

Raising the demand schedvie 65 n. 

Rate of profits 295 

Real and money income 51 
cost of production 195 
wages 263 

Rent 52, 97, 303—6; of natural abili 
ties 231 n., 302 n. ; in relation to 
cost of production 202—3, 405 — 7 ; 
difference between it and other 
earnings 252; in relation to quasi- 
rent 230, 302 n., 409—10; 'and rise 
m value of prmluce 304 ; effect of 
progi-ess on 336; restatement of 
classical doctrines as to 406—7; 
of building land 407 n. 

Representative, firm 180 

Eesiduum 345 

Eicardo on law of uuninishing return 
100 ; on rent 202, 307 n. ; on wages 
412, 413 ^ 

Risk 228—9, 284, 285—6 

Rival supply 223 

Buskin 22 

Sargant 137 

Satiable wants, law of 62 

Saving, slow growth of habits of 129— 
133; conditions of 133—5; its con- 
nection with rate of interest 136 — 8 

Schloss 172 n., 259 n. 

Schmoller 396 

Secular movements of price 216 

Senior 57 

Settlement laws 108 

Shift system 350 — 1 

Shopkeeping 161 n. 

Skill, a relative term 120 — 1 

Slavery 3 

Sliding scales 301, 331 u., 395 n. 

Small holdings 314, 315 



Smith, Adam, on wealth 37; on the 
word value 39; on capital 45; on 
division of labour 139, 140, 142, 
148 n. ; on wages 263, 266, 411, 412 

Social capital 47 ; income 52 ; law 26 

Specialised ability 50; capital 50 

Spencer, Herbert 82 

Stable equilibrium 198 

Standard of comfort in relation to 
wages 233 — 4, 347—8 

Standard of life 233—4, 346 

Stock Exchange securities 187 — 8 

Strikes, cost of 374 — 5 

Subsidiary trades 153 

Substitution, principle of 196, 205 — 6, 
221, 239 n., 256; its relation to law 
of survival of fittest 287; to earn- 
ings of management 289 — 293 

Supplementary cost 206 — 7, 226; earn- 
ings 265 

Supply curve 198 n. 

Supply, law of 197 

Supply point 198 n. 

Supply price 86, 193 ; long-period and 
short-period 211—217 

Supply schedide 197 

Surjdus produce 96; its relation to 
rent 97, 303—6 - 

Survival of the fittest, law of 140, 
116—17, 287—8 

Sweating system 163 — 4, 386 

Taxation 21 

Technical education 123 — 4 

Temporary balance or equilibrium 

Tljomton 366 n. 
Time, the element of, in economic 

problems 67, 73—4, 189, 199—201, 

Time earnings 260 
Total utility 62 

Town life, influence of 115 — 16 
Towns, growth of large 119 n. 
Trade capital 46 
Trade combinations 274 — 5 
Trade federation 382—3 
Trade, regulation of 395 n. 

Trade rishs 285 

Trade Unions, early policy of 12—13, 
15; in relation to law of derived 
demand 218 — 221; their influence 
on wages 274 — 5; 358 — 395 

Transferable and non-transferable 
goods 35 — 6 

Transport industries 155, 161; their 
influence on value 331 — 2 

Truck system 264 n. 

Turnover, profits on 298 — 9 

Undertaker 162 

Undertahing, earnings of 52 (see 

Management, earnings of) 
Unskilled labour 120 
Utility 61; marginal 63; total 62; 

measurement of 79 — 81; utility in 

relation to cost of production and 

value 200—201 

Value 39—40 

Wages (see Earnings) 

Wages-Fund 235, 413—16 

Waiting, rather than abstinence re- 
warded by interest 136 

Wakefield 317 

Walker 413 

Wants, elasticity of 69 — 74; in rela- 
tion to activities 58 — 60, 346 — 8 

Wealth 36—7 ; and well being 1—2, 
128, 248—9, 81-^; growth of 129— 
138, 337 

Webb 359 n., 395 n. 

Women's wages, influence of progress 
on 341—2, 389 

Working classes, condition of early 
in the century 12 — 15 ; latent genius 
among 125 ; improvement in con- 
dition of 343—5 

Working man, his opportunities of 
rising and his difliculties 172 — 5 ; a 
rapid rise not an unmixed benefit 

Work-Fund 353 

Young, Arthur 308 





Principles of Economics. By Alfred Marshall, M.A., 
Professor of Political Economy in the University ot 
Cambridge. Two Yols. Vol. I. Fourth Ed. 8vo. 
12s. 6c?. net. 

SeowmUe Review.^" The greatest economic treatise written by any Englishman in 
our generation." 

Saturday Remew.-' Is. without doubt, amoug the most important <»J^tributioM to 
poUtical science made by English authors within recent times. . H^,^^' ^^^jJ^J*^ 
Orifice of scientific exactness, has a Uterary ment and a huma" mter^t which ^ 
exceedingly rare in works on the subject... It is not too much to say t^at jvhen hw 
work is «)mplete. Mr Marshall will have done for economic science in this generation 
what was done for it by J. S. INIill in the last." 

Tirtus-- It is a contribution of capital importance to the higher literatvure of 
econom^ science. Professor Marshall has long taken high rank among the leaders of 
?S^ mSerT cS of poUtical economists. Long before the pubUcation f J;;s «ceUent 
Economics of Industry, in 1879, those who follow the course of economical enquiry in its 
ler^Tul? and more technical developments, had recognised his rare power of lucid 
exSon Ind his profound grasp of economical theory, alike in its historical develop- 
ment a^inHs practical applSions. . .The present work abundantly justifies the high 
"putrtion of its author. . .It exhibits a profound and extensive acquaintance with the 
geSeSlS^e of economic speculation, not only in England, but »n/^0P« ^^^^ the 
UnitTd States. . . .What is still more characteristic of the work is its wide command and 
feScitous appU^^^^^ of 'curious facts,' its searching analysis of the mee^°rj? °' 
biiness of ^aU kinds, and its masterly treatment of human ^twn^-^ ^ ' ^b^t and 
bearing on economical problems. .. .Its style is eminently worthy "'I'^J^'^^Kl''^ 
admirably adapted to its treatment. Lucid, cogent, restrained, and. ^^t^l' 8*««Pf? .^^ 
^oiSdge and saturated with thought, it never wearies the reader, but cames lum 
SSptiWy onwards, through speculations of the utmost intricacy and disquisitions 
S^^rdeepest moment, to conclusions which seem to flow so naturally from the 
pre^sses that the difficulty of the journey is beguiled by the fascinations of the 
sS^rding scenery, and its length concealed by the ease with which its destination is 

Times (second rwtice).-" ThiB great treatise on Economic Science bids fair to take 
for the prS ge^Sn the plaS which MiU's work took for the generation of forty 
years ago." 

O&scrwr-" Since Mill's work on political economy was published, we know of 
none eS perha^ Carl Marx's disquisition on Capital, which can approach it for 
?XW of knowledge and rich variety of practical illustration. InteUectual inde- 
n^dScfand intrepidity is the distinctive note of Professor Marshall's appreciations. 
JnS hi^ ^rk may b?LLbed a singularly clear, calm, and candid criticism of the 
economic teaching of our time." 

Morning Post.-" It is worthy of high praise. It is not by any means a duU teit- 
bookofl dismal science. Though it conducts the reader, by progressive stages^ from 
S^earliesTStSn of industrial forces to the elaborate and complex t^de system of 
the present day. it is so pleasantly studded with interesting facts and apt illustrations 
that its soUd arguments are not felt to be unduly heavy. 

Dailv Chronicle -"Wm probably become for the present generation what Mill's 
'PrincTpL- Z for the last.^. .Mr MarshaU's study of industrial history is unus^Uy 
thorSugh-hisTok. indeed, is nearly as full of facts as the ' Wealth of Nations itself. 



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Elements of the economics 

of industry. 


fnSH- 000^9 
NEH ^^^^^994 

APR 2 5 1958 

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